Twenty-first century trade, as defined by Baldwin (2011), is a much more complex phenomenon than trade prior to the early 1980s. This complexity is the result of the increased role of international production networks in the global economy, which are characterised by the unbundling of stages of production across borders.
The expansion of production networks should be related to the proliferation of deep agreements aimed at filling a governance gap between countries. In order for cross-border production to operate smoothly, certain national policies need to be harmonised to facilitate business activities in several countries. This generates a demand for deep forms of integration (Lawrence 1996). In addition, the evolution of production networks is directly responsible for the growing demand for deep agreements that can address new cross-border effects that go beyond the standard trade-policy externalities, when goods are produced in a single location (Antràs and Staiger 2008).
Whilst the determinants and the effects of PTAs have been widely studied, the empirical literature on the relationship between trade and deep integration is very limited. One of the main reasons for this derives from the difficulties that arise when defining and measuring the depth of an agreement.
This column introduces our new CEPR Policy Insight (Orefice and Rocha 2011), which highlights new evidence on the two-way link between deep integration and production networks for a set of 200 countries from 1980 to 2007. In order to capture the depth of an agreement, we construct a set of indexes, in terms of the coverage of policy areas, using WTO data1 on the content of preferential trade agreements derived from a comprehensive mapping and coding of 96 PTAs signed between 1958 and 2010.
We also present evidence that countries involved in North-South production networks are more likely to sign deeper agreements. Production networks between developed and developing countries have become more important in recent years. Some of the costs related with international fragmentation of production might be particularly high for developing nations who mostly lack the sophisticated business law and the product and labour regulations which are essential for rich countries to consolidate their trade in intermediates (Baldwin 2011).
We also highlight the importance of the relationship between deep integration and production networks in East Asia. In the region, the growth of production-sharing first took place through de facto economic integration. However, deep integration is necessary for production networks to continue to prosper. More recent agreements, such as Japan's economic partnerships with Malaysia, Indonesia, Thailand and Viet Nam, or ASEAN's push for deeper disciplines clearly show that this region is moving towards deeper integration.
This analysis is a starting point for further research on the relationship between production networks and deep integration. More theoretically founded methodologies could be developed in order to quantify the level of depth of preferential trade agreements. In addition, new techniques could be considered in order to better characterise the global pattern of production networks and therefore to assess the complexity of an economy and its relationship with deep integration. Finally, this paper opens more general questions that merit further investigation such as the complementarity between trade liberalisation and deep integration in a world where international supply chains are becoming more relevant.
Antràs, P and R Staiger (2008) "Offshoring and the Role of Trade Agreements" CEPR Discussion Paper 6966.
Baldwin R (2011) "21st century regionalism: Filling the gap between 21st century trade and 20th century trade rule”, CEPR Policy Insight 56.
Lawrence, R. Z. (1996), "Regionalism, Multilateralism and Deeper integration" Washington DC: Brookings Institution
Orefice, G and Nadia Rocha (2011), “Deep integration and production networks”, CEPR Policy Insight No. 60, Centre for Economic Policy Research, 25 November
1 The dataset is available at http://www.wto.org/english/res_e/publications_e/wtr11_dataset_e.htm