Trade agreements and Global Value Chain (GVC) participation: Evidence from Chinese industries

The growing fragmentation of production across national borders and the proliferation of preferential trade agreements (PTAs) have become salient features of the global economy in the past decades. This paper examines the role of PTAs in promoting the integration of domestic industries into global value chains (GVCs) based on the experience of China, a country that has emerged as a key link in East Asian and global production networks in recent years. We conjecture that both the presence of PTAs and the depth of these agreements matter for GVC participation. Furthermore, PTAs that contain strong provisions with regard to investment protection and services are particularly likely to stimulate the expansion of GVC linkages. This is because strong investment protection provisions may reduce the disruptions that hostile government policy may generate for the entire production chain. Rigorous PTA provisions regarding services may help facilitate the provision of services, which are not only critical in enabling the emergence of GVCs, but are also becoming essential inputs in GVC trade. Empirical analysis of the effect of the PTAs signed by China on the GVC participation of 16 Chinese industries between 2005 and 2015 lends substantial support to our hypotheses.