Do deep regional trade agreements facilitate regional production networks in Latin American and Caribbean countries?

Abstract Applying a generalized event study design to a structural gravity model, this study analyzes the dynamic effects of the depth of regional trade agreements (RTAs)—measured by the coverage and legal enforceability of World Trade Organization (WTO)-plus and WTO-extra policy areas—on production network trade in all 33 Latin American and Caribbean (LAC) countries from 1986 to 2015. It constructs a unique dataset on the indexes of depth, breadth, and core depth of all RTAs in force involving at least two LAC countries, using a World Bank database on RTA content. The results indicate that the depth and breadth of RTAs positively affect intra-regional parts and components exports in the LAC region. Moreover, no differential trends exist prior to RTA signature, supporting the causal interpretation of the results. However, the effects are substantially heterogeneous by the type of agreements and characteristics of country pairs. The depth and breadth consistently show positive effects 2 years after the enforcement for the customs union among Latin American countries (the Southern Common Market, MERCOSUR), and plurilateral free trade agreements (FTAs) in the LAC countries. Conversely, the depth and breadth show immediate negative effects for plurilateral FTAs with developed countries outside the region (e.g., the United States or European countries). Furthermore, the depth of RTAs has particularly significant effects on parts and components exports compared to other trade categories, such as primary goods exports.