In Too Deep? The Economic Impacts of Deep Trade Agreements

As preferential trade agreements (PTAs) have grown in their scope and complexity, so too has the need to capture this heterogeneity in assessments of their effects. This paper demonstrates an approach for estimating the effects of “deep” PTAs that allows for non-linear impacts from increased depth. It finds that deeper PTAs can increase trade but that there are diminishing—and eventually negative—marginal returns from adding additional policy provisions. This finding fits the observation that certain deep policies may represent new frictions to trade rather than facilitation efforts. To illustrate the potential trade and welfare gains that can be attained by increasing the depth of shallow PTAs, a series of counterfactual simulations are undertaken using the Agadir agreement between Egypt, Jordan, Morocco, and Tunisia as an example. The counterfactual analysis suggests that increasing the depth of the relatively shallow Agadir agreement could increase trade between its members by about 13 percent and the value of their real manufacturing outputs by up to 0.03 percent. Notably, the exercise demonstrates that the optimal version of an agreement is not necessarily the deepest. Keywords: International trade, trade agreements, non-tariff measures, gravity, general equilibrium