Part II. Global and regional value chains participation in Africa and Asia
6. The importance of intermediate merchandise inputs in key value chains in Africa and Asia
6.6 What role for FTAs?
Although the analysis above shows how trade in intermediates distributes across regional and non-regional partners, it does not take into account other possible determinants of regional trade such as difference in the size of markets or indeed geography. In what follows we formalise the analysis through the use of a gravity model so as to better understand how trade with regional partners has evolved and what the role of trade agreements in shaping such trade could be.
The proliferation of trade agreements has been concurrent with the international fragmentation of production and therefore it is important to understand their role in shaping regional trade patterns,
OECD TRADE POLICY PAPER N°179 © OECD 2015
particularly in intermediates. Specific questions include: i) what impact have trade agreements had on trade flows?; ii) do these affect intermediate goods differently?; and iii) is there a premium to signing agreements with regional partners?85
The analysis shows that trade with countries in the same region (Reg. Trade in Figure 16) is around 25% higher than trade with non-regional partners (after controlling for typical geographical factors, country-product-year characteristics and discounting the effect associated to there being an FTA with a regional partner). FTAs with any partner (Bilateral TA), whether in the same region or not, also increase trade by around 10%, but FTAs with regional partners do so by 33% (Reg Trade + TA). Since these effects are multiplicative (see note in Figure 17) cumulative what this tells us is that there seems to be an important premium, in terms of trade flows, related to signing an FTA with a regional partner.
Figure 16. Impact of FTAs on regional trade flows
Source: Authors’ calculations based on BACI database.
The impact of FTAs is however different for each product category analysed, as is highlighted in Figure 17. Where regional trade is concerned, it is the electrical and optical equipment sector which is traded most intensively amongst regional partners (i.e. there is on average 42% more trade with partners in the same region than there is with the average partners outside the region) but the highest impact of an FTA arises in the textile and vehicles sectors where there is an average 19% return in terms of signing an agreement. Finally, the highest premium to signing an agreement with a partner in the same region arises in the vehicle sector, where trade is boosted by an additional 75% (this sector is closely followed by foodstuff where the corresponding figure is 61%).
85. The estimations are run for the seven industries that are the focus of earlier section. They use country-product-year fixed effects so as to control for multilateral resistance and other unobserved variables that do not vary within this dimension. This methodology should also attenuate biases caused by unobserved heterogeneity related to capturing the impact of FTAs on trade flows (see Baier and Bergstrand, 2001, 2004 and 2009 for a description of the problem and Lopez-Gonzalez (2012) for a similar application to intermediate goods trade).
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Average change (%) across 7 sectors Reg. Trade + TA
Bilateral TA Reg. Trade Common language Colonial links Common border Bilateral distance (*)
(*) Change of a doubling of distance in km
at the HS6 digit level
Determinants of bilateral trade flows
Figure 17. Impact of FTAs on regional trade by sector
Note: Bars identify contribution of different elements to increasing trade with regional partners.
For example, for sector HS87- Vehicles: i) trade with regional partners in this sector tends to be 28% higher than with non-regional partners (Coefficient on Reg. Trade); ii) An FTA with any partner leads to an additional 19% trade (Coefficient on Bilateral TA.); and iii) Having an FTA with a regional partner increases trade by an additional 75% (Coefficient on Reg. Trade + TA).
The cumulative impact of signing an FTA with a regional partner will boost trade by over 120%
(i.e. the values are multiplicative but are presented here individually for clarity; this means that the combined impact is greater than the simple sum of the individual effects).
Source: Authors’ calculations based on BACI database.
Comparing these results to those obtained from looking at trade in processed intermediates within these sectors (Figure 18) and focusing the discussion mainly on the manufacturing sectors we see that86:
Processed intermediate goods trade with countries in the same region is more intense than that observed for aggregate trade;
The impact of an FTA, with any partner whether in the same region or not, also tends to be larger; but
The premium associated to signing an agreement with a partner located in the same region relative to that witnessed for total trade varies across sectors. For example, FTAs with regional partners increase processed intermediate trade in electrical equipment and metals by less than was seen in the case of aggregate trade and it is actually found to reduce trade in the textiles sector.
86. We focus on the manufacturing sectors since these are likely to be most sensitive to trade in processed intermediates.
9 18
34 17
31 42 28
3 9
15 19
6 4 19
33
61 26 11
14 12
75
0 20 40 60 80 100 120 140
Agriculture (HS01-15) Foodstuff (HS16-24) Plastic/Rubb er (HS39-40) Textiles (HS50-63)
Metals (HS72-83) Electr. Equip.
(HS85) Vehicles
(HS87)
Reg. Trade Bilateral TA Reg. Trade + TA
OECD TRADE POLICY PAPER N°179 © OECD 2015
Figure 18. Impact of FTAs on regional trade in processed intermediates by sector
Note: Bars identify contribution of different elements to increasing trade with regional partners.
See figure 17 for interpretation.
Source: Authors’ calculations based on BACI database.
Since trade agreements are found to have a higher impact on trade flows of intermediate goods than on aggregate trade flows, one key element to further develop regional value chains may be that of engaging in regional trade agreements, that is to say, with partners located in the same region.
The regional orientation of intermediate and consumption goods trade across the different sectors and regions analysed reveals some interesting insights (Figure 19).87 In SEA there is an important regional orientation of intermediate goods trade but the opposite is observed when consumption goods are considered, attesting to the common perception that SEA has engaged in complex production networks aimed at selling consumption goods to third markets. In SAS we see the opposite trend, in most sectors, intermediate trade is mainly conducted extra regionally but consumption goods are traded regionally and this likely supports the findings that there is very little by way of regional value chains in South Asia. The case of the African regions and MENA is different again. Here we see that there is a strong regional orientation in both trade in intermediates and in consumption goods.
87. This Figure shows the decomposition of the Reg.Trade coefficient in Figure 18 across the different regions. It marks the orientation of regional trade net of whether there is a trade agreement or not.
5 13
33 41 38
55 29
-4 9
16 35 11
10 23
54 50
28 -4
10 5
76
-20 0 20 40 60 80 100 120 140
Agriculture (HS01-15) Foodstuff (HS16-24) Plastic/Rubber (HS39-40) Textiles (HS50-63) Metals (HS72-83) Electr. Equip. (HS85) Vehicles (HS87)
Reg. Trade Bilateral TA Reg. Trade + TA
Figure 19. Orientation of trade towards regional partners across different sectors
Intermediate goods Consumption goods
Note: Positive values identify higher average trade with partners in the same region than with the rest of the world. The sign of the coefficients is more important than the size since these are to be evaluated at mean levels and these means vary across the different regions and sectors therefore making these comparisons tricky.
Source: Authors’ calculations based on BACI database.
Finally, in Figure 20 we show the estimated impact of signing a trade agreement with a regional partner on processed intermediate goods trade. Positive values in the figure show that there is a regional orientation in terms of trade flows.88 There is a very clear positive effect of FTAs with regional partners in ESA and in SAS whilst in MENA and WCA we observe the opposite. The case of SEA is mixed where agreements with regional partners have managed to increase trade in vehicles and electrical equipment but they have not done so for the other sectors where trade might be more intense with extra regional partners.
88. The figure essentially maps the coefficients obtained from the dummy variable capturing regional trade across the different regions thereby showing whether there is a regional orientation or not.
-100 -50 0 50 100 150 200
ESA
MEN
WCA
SAS
SEA
Agriculture (HS01-15) Foodstuff (HS16-24) Plastic/Rubber (HS39-40) Textiles (HS50-63) Metals (HS72-83) Electr. Equip. (HS85) Vehicles (HS87)
-100 0 100 200 300 400
ESA
MEN
WCA
SAS
SEA
Agriculture (HS01-15) Foodstuff (HS16-24) Plastic/Rubber (HS39-40) Textiles (HS50-63) Metals (HS72-83) Electr. Equip. (HS85) Vehicles (HS87)
OECD TRADE POLICY PAPER N°179 © OECD 2015
Figure 20. Impact of signing an FTA with a partner within the region Intermediate goods at the HS6 digit level
Source: Authors’ calculations based on BACI database.