Preferential trade agreements and global sourcing

Bickwit, Grant, Ornelas, Emanuel ORCID: 0000-0001-8330-8745 and Turner, John L. (2018) Preferential trade agreements and global sourcing. CEP Discussion Papers (CEPDP1581). London School of Economics and Political Science. Centre for Economic Performance, London, UK.

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Abstract

We study how a preferential trade agreement (PTA) affects international sourcing decisions, aggregate productivity and welfare under incomplete contracting and endogenous matching. Contract incompleteness implies underinvestment. That inefficiency is mitigated by a PTA, because the agreement allows the parties in a vertical chain to internalize a larger return from the investment. This raises aggregate productivity. On the other hand, the agreement yields sourcing diversion. More efficient suppliers tilt the tradeoff toward the (potentially) beneficial relationship-strengthening effect; a high external tariff tips it toward harmful sourcing diversion. A PTA also affects the structure of vertical chains in the economy. As tariff preferences attract too many matches to the bloc, the average productivity of the industry tends to fall. When the agreement incorporates "deep integration" provisions, it boosts trade flows, but not necessarily welfare. Rather, "deep integration" improves upon "shallow integration" if and only if the original investment inefficiencies are serious enough. On the whole, we offer a new framework to study the benefits and costs from preferential liberalization in the context of global sourcing.

Item Type:	Monograph (Discussion Paper)
Official URL:	http://cep.lse.ac.uk/
Additional Information:	© 2018 The Authors
Divisions:	Centre for Economic Performance
Subjects:	H Social Sciences > HB Economic Theory H Social Sciences > HC Economic History and Conditions H Social Sciences > HF Commerce
JEL classification:	D - Microeconomics > D2 - Production and Organizations > D23 - Organizational Behavior; Transaction Costs; Property Rights D - Microeconomics > D8 - Information, Knowledge, and Uncertainty > D83 - Search; Learning; Information and Knowledge; Communication; Belief F - International Economics > F1 - Trade > F13 - Commercial Policy; Protection; Promotion; Trade Negotiations; International Trade Organizations F - International Economics > F1 - Trade > F15 - Economic Integration L - Industrial Organization > L2 - Firm Objectives, Organization, and Behavior > L22 - Firm Organization and Market Structure: Markets vs. Hierarchies; Vertical Integration; Conglomerates; Subsidiaries
Date Deposited:	11 Jan 2019 12:57
Last Modified:	13 Sep 2024 20:42
Funders:	Economic and Social Research Council
URI:	http://eprints.lse.ac.uk/id/eprint/91704

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