Deep Trade Agreements and FDI in Partial and General Equilibrium: A Structural Estimation Framework

2023-03-10 09:36:12 · World Bank

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Abstract

This paper quantifies the relationships between deep trade liberalization and foreign direct investment. To this end, it focuses on the effects of deep trade agreements. The analysis relies on a structural framework that simultaneously enables (i) estimating the direct impact of deep trade agreements on foreign direct investment, (ii) translating the partial deep trade agreement estimates into general equilibrium effects on foreign direct investment; and (iii) obtaining partial deep trade agreement effects on trade and quantifying the impact of deep trade agreements on foreign direct investment through trade. The paper obtains sizeable, positive, and statistically significant estimates of the effects of deep trade agreements on both trade and foreign direct investment. A counterfactual analysis suggests that together with direct and indirect channels deep trade agreements have contributed.

1 Introduction:

Motivation and Contributions Most modern preferential trade agreements (PTAs) include a variety of investment provisions. As pointed out by Crawford and Kotschwar (2020), Following the entry into force of NAFTA and the GATS, trade negotiators increasingly began to incorporate into PTAs a broad set of investment provisions that liberalize, protect, and regulate investments. (p. 145). The increase, both in absolute and in relative terms, in the number of PTAs with investment provisions is depicted in Figure 1, which comes from Crawford and Kotschwar (2020).

Using the World Bank's Database on the Content of Regional Trade Agreements (DCRTA), cf. Hofmann et al. (2019) and Mattoo et al., eds (2020), we complement Figure 1 by plotting the number of country-pairs that have signed a trade agreement that includes investment provisions. Figure 2 clearly corroborates the evidence from Figure 1 by depicting a remarkable increase in the country-pairs that have negotiated investment together with trade, especially since the early 1990s as noted in the opening quote from Crawford and Kotschwar (2020).