Deep integration and GVC participation in developing countries: the role of investment provisions in PTAs

Abstract Joining and upgrading in GVCs is a priority for developing and emerging economies. PTAs can serve as a policy tool to promote GVC participation. PTAs can mitigate the contractual frictions which affect trade in GVCs by paving the way for deeper forms of integration. In this paper, I ask whether one specific class of PTA provisions – legally enforceable investment provisions going beyond the TRIMS agreements – increase trade in customized inputs between industrialised and developing economies. Using a structural gravity approach and data on gross trade flows from BACI during the 1995-2018 period, I find that this is indeed the case. Investment provisions in PTAs tend to increase the flow of these goods between the Global North to South by between 15 and 20 percent. These results are driven by the role of investment provisions in PTAs in bridging institutional gaps in lower-income economies.