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Deep integration and production networks: an empirical analysis

In this paper, the two way relationship between deep integration and production networks trade is investigated.

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Deep integration is captured by a set of indices constructed in terms of policy areas covered in preferential trade agreements. An augmented gravity equation is estimated to investigate the impact of deep integration on production networks.  The results show that on average, signing deeper agreements increases production networks trade between member countries by almost 35 percentage points. In addition, the impact of deep integration is higher for trade in automobile parts and information and technology products compared with textiles products. To analyse whether higher levels of network trade increase the likelihood of signing deeper agreements the literature on the determinants of preferential trade agreements is followed. The estimation results show that, after taking into account other PTAs determinants, a ten per cent increase in the share of production network trade over total trade increases the depth of an agreement by approximately 6 percentage points. In addition, the probability of signing deeper agreements is higher for country pairs involved in North-South production sharing and for countries belonging to the Asia region.

No: ERSD-2011-11

Author:
Gianluca Orefice — WTO
Nadia Rocha — WTO

Manuscript date: July 2011

Key Words:

regionalism, deep integration, production networks

JEL classification numbers:

F13, F15, F14


  

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This is a working paper, and hence it represents research in progress. This paper represents the opinions of the author, and is the product of professional research. It is not meant to represent the position or opinions of the WTO or its Members, nor the official position of any staff members. Any errors are the fault of the author. Copies of working papers can be requested from the divisional secretariat by writing to: Economic Research and Statistics Division, World Trade Organization, Rue de Lausanne 154, CH 1211 Geneva 21, Switzerland. Please request papers by number and title.

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