Formation of interdependent regional trade agreements and production networks

Abstract

Production networks (PNs) can be defined as a determinant of trade partnership. Deepening PNs may generate positive welfare effects and lead to a proliferation in the formation of interdependent regional trade agreements (RTAs). This paper theoretically develops the link between PNs and the formation of RTAs and empirically investigates the link by applying a qualitative choice model estimation methodology (probit) with panel data that covers bilateral country-pairs among 147 countries between 2000 and 2010. We find that the RTA formation has been strongly driven by deepening PNs between members as well as with third countries. We also find that production network-driven RTA interdependence is member specific.