Trade Creation and Trade Diversion in Deep Agreements AADITYA MATTOO, ALEN MULABDIC, MICHELE RUTA Workshop on the “Economics of International Trade Agreements” Disclaimer: The views expressed in this article are those of the authors and they do not necessarily Villars-sur-Ollon, February 2017 represent the views of the World Bank Group Questions and motivation • Since 1990 there has been a surge of preferential trade agreements (PTAs). • The nature of these agreements has been changing as well, with PTAs covering measures beyond tariffs (“deep” PTAs). • Questions: • What policy areas do deep agreements cover? • What are their trade effect on members and non-members? • What would be the consequences of undoing US PTAs? Deep trade agreements Preview of main findings • Content of PTAs • The number of provisions has increased of a factor of 2 in the last quarter century • Viner revisited • Deep agreements lead to more trade creation and less trade diversion than shallow agreements • Application • Undoing US deep PTAs would have a large negative impact on the US and its trade partners Deep trade agreements Literature review • Content of PTAs • Classification of US and EU PTAs (Horn et al. 2010) • Extension to 100 PTAs (WTO, 2011) • Extension to 279 PTAs (Hofmann et al. 2016) • Trade Creation • Dummies (e.g. Rose (2004)) • Type of agreements: one-way PTAs, two-way PTAs, FTAs, customs unions, common markets and economic unions (Baier et al. (2014)) • Trade Diversion • Dummies (e.g. Dai et al. (2014)) • Continuous variables for trade diversion (Baldwin and Jaimovich (2012); Fugazza and Nicita (2013)) Deep trade agreements The content of PTAs Since 1990 there has been a surge of preferential trade agreements (PTAs) 35 300 30 250 25 200 20 150 15 100 10 50 5 0 0 195119531955195719591961196319651967196919711973197519771979198119831985198719891991199319951997199920012003200520072009201120132015 Number of PTAs Cumulative Deep trade agreements On average one country participates in fourteen agreements Deep trade agreements The continuing proliferation of PTAs over the last 30 years involves a wide network of participants Deep trade agreements PTAs are also becoming “deeper”: Coverage in terms of policy areas has widened over time 35 300 30 250 25 200 20 150 15 100 10 50 5 0 0 195119531955195719591961196319651967196919711973197519771979198119831985198719891991199319951997199920012003200520072009201120132015 More than 20 Between 10 and 20 Less than 10 Not in force Cumulative Deep trade agreements The Database: 279 Agreements ( ) http://data.worldbank.org/data-catalog/deep-trade-agreements "WTO plus" "WTO extra" areas covered by the WTO areas beyond the WTO  Tariffs industrial goods  Anti-corruption  Financial assistance  Tariffs agricultural goods  Competition policy  Health  Customs administration  Environmental laws  Human Rights  Export taxes  IPR  Illegal immigration  SPS measures  Investment measures  Illicit drugs  State trading enterprises  Labour market regulation  Industrial cooperation  TBT measures  Movement of capital  Information society  Countervailing measures  Consumer protection  Mining  Anti-dumping  Data protection  Money laundering  State aid  Approximation of legislation  Nuclear safety  Public procurement  Agriculture  Political dialogue  TRIMS measures  Audiovisual  Public administration  GATS  Civil protection  Regional cooperation  TRIPS  Innovation policies  Research and technology  Cultural cooperation  SMEs  Economic policy dialogue  Social Matters  Education and training  Statistics  Energy  Taxation  Terrorism  Visa and asylum