Even as obituaries are being written for globalization, many countries are getting into ‘deeper’ trade agreements with each other, with provisions going much beyond the usual tariff reductions associated with plain vanilla trade agreements.
Following is the World Bank definition of Deep Trade Agreement (DTA):
“ As against shallow trade agreements, that cover tariffs and other border measures, DTA are reciprocal agreements between countries that cover not just trade but additional policy areas, such as international flows of investment and labor, and the protection of intellectual property rights and the environment. The goal of DTAs is integration beyond trade or deep integration.”
The rise in DTAs reflect important changes in the nature of trade. Firstly, the importance of the services sector has increased across the world creating new complexities in trade flows. Secondly, with global average tariff rates plummeting as a result of trade integration, non-tariff trade barriers in the form of regulatory differences between countries such as intellectual property rights, labour and environment standards etc. are emerging as the major trade bottlenecks. Finally, the rise of global value chains means that intermediate goods cross borders several times before the final product is sold, making compliance with conventional trade agreement clauses difficult. DTAs help countries deal with these complexities in trade flows.
Studies find that DTAs:
lead to more trade creation than diversion and hence create more trade. Additionally, some provisions of deep agreements have a public good aspect which leads to positive spillover effect on trade with non-members
are correlated with vertical FDI.
can amplify services trade because they address both tariff and behind-the-border trade barriers and contribute to welfare gains
foster GVC-related trade among participating countries. Additionally, the more closely the countries are tied with GVC-related trade, the more likely they are going to have deep trade agreements between them, studies suggest.
smoothen trade facilitation which in turn enhance performance of GVC firms by reducing trade costs and uncertainty associated with import processes
can encourage countries to reduce pollution, engage in environmentally sustainable trade, and therefore lead to greening of economies
But wait, DTAs are not bereft of concerns.
DTAs, that go beyond tariffs (which are discernible) to eliminate trade costs associated with regulatory differences across countries (which are usually unobservable and depend on various country-specific factors), might empower special interest groups (or lobbyists) having a huge stake in expanding exports, as Dani Rodrik argues in this paper published in the Journal of Economic Perspectives. In this regard, a recent study by Michael Blanga-Gubbay and others find evidence that large multinational corporations indeed lobby to include those provisions in the agreements that are favourable to them. Such trade agreements will result in welfare-reducing outcomes under the guise of free trade, as the gains from trade will be concentrated in lobbying firms.
DTAs are mostly negotiated between similar developed countries. This raises the question: how efficient are DTAs between countries at different levels of development, with different tariff structures, and with different socio-economic policy objectives etc.? The answer to this question is not yet clear but new research <https://voxeu.org/content/economics-deep-trade-agreements-new-ebook> by Lionel Fontagné and others suggest that developing countries may be better off deepening existing trade agreements between them, than in attempting to sign new trade agreements with developed ones.
That said, DTA’s are the flavour of the season, and the coming years could see more, not less of DTAs.