Why your neighbor matters: Positions in preferential trade agreement networks and export growth in global value chains

Abstract

In rapidly expanding global and regional preferential trade agreements (PTA) networks, policy-makers are keen to situate their countries in a better position, believing that a better position in PTA networks will help their economies trade more and grow faster. In this paper, we provide a theory that explains how changes in countries' PTA network positions affect their trade performance. We argue that a dense and deep "neighbor network" provides a country with a wide access to global value chains, better protection to investment, and strong credibility to their policy commitments. To measure trade performance, we compute value-added exports at the country, year, and industry level across 43 countries, 56 industries, and 15 years (2000-14). The estimation of network position effects is done by panel fixed-effects methods and the sample-splitting and cross-fitting double machine-learning method. The findings show that as a country's neighbors have deeper and wider PTA networks, the country's value-added exports grow faster. Also, the industry-level analysis shows that sectors heavily engaging in the fragmentation of production stages exhibit faster growth with the improvement of neighbor networks.