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Preferential trade agreements and global sourcing

Emanuel Ornelas, John L. Turner and Grant Bickwit

Journal of International Economics, 2021, vol. 128, issue C

Abstract: We develop a new framework to study the welfare consequences of preferential trade agreements (PTAs) under global sourcing, incomplete contracts and endogenous matching. We uncover several new channels through which PTAs affect global welfare. Some effects stem from intensive margin changes—i.e., changes in investment and production in existing vertical chains—and from extensive margin relocations—i.e., due to the formation and destruction of vertical chains. In each case, there are potential trade-creating, trade-diverting and relationship-strengthening forces. The first two are reminiscent of the classical Vinerian approach, but take different forms under global sourcing. The third is entirely new in the regionalism literature and arises because PTAs affect the severity of hold-up problems in sourcing relationships. We characterize those forces and show circumstances when PTAs are necessarily welfare-enhancing or welfare-decreasing. In particular, we show that, because of the relationship-strengthening effect, PTAs can improve global welfare even when all types of trade-creation forces are absent.

Keywords: Regionalism; Hold-up problem; Sourcing; Trade diversion; Matching; Incomplete contracts (search for similar items in EconPapers)
JEL-codes: D23 D83 F13 F15 L22 (search for similar items in EconPapers)
Date: 2021
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Related works:
Working Paper: Preferential trade agreements and global sourcing (2018) Downloads
Working Paper: Preferential Trade Agreements and Global Sourcing (2018) Downloads
Working Paper: Preferential Trade Agreements and Global Sourcing (2018) Downloads
Working Paper: Preferential Trade Agreements and Global Sourcing (2018) Downloads
Working Paper: Preferential trade agreements and global sourcing (2018) Downloads
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Persistent link: https://EconPapers.repec.org/RePEc:eee:inecon:v:128:y:2021:i:c:s0022199620301100

DOI: 10.1016/j.jinteco.2020.103395

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