Deep Integration and Production Networks: An Empirical Analysis

Abstract

This paper investigates the two‐way relationship between deep integration and production networks trade. We capture deep integration with a set of indices constructed in terms of policy areas covered in preferential trade agreements. We estimate an augmented gravity equation to investigate the impact of deep integration on production networks trade. The results show that on average, signing deeper agreements increases production networks trade between member countries by almost 12 percentage points. In addition, the impact of deep integration is higher for trade in automobile parts and information and technology products compared with textile products. To analyse whether higher levels of network trade increase the likelihood of signing deeper agreements, we follow the literature on the determinants of preferential trade agreements. The estimation results show that, after taking into account other PTA determinants, a ten percentage increase in the share of production network trade over total trade increases the depth of an agreement by approximately 6 percentage points. In addition, the probability of signing deeper agreements is higher for country pairs involved in North–South production sharing and for countries belonging to the Asia region.