Bilateral servicification in global value chains and deep trade agreements

Abstract

International trade has been transformed by participation in global value chains (GVCs), where services linkages play a critical role. Recent studies examine the impact of deep trade agreements on GVC-related trade, but none of them focusses on GVC-related services. Using the gravity framework, this paper investigates the impact of trade agreements with substantial provisions on services on bilateral foreign services value added embodied in manufacturing exports. We also consider the depth of these agreements and explore the asymmetric effects depending on the partners’ income level, the EU membership and on the direction of the trade flows. The analysis reveals that deep trade agreements with services provisions boost embodied services value added from partner countries, with larger impacts for deeper agreements. Moreover, there are heterogeneous effects, which are particularly significant for North–North flows and for embodied services value added from EU countries. Therefore, those deep trade agreements seem to allow the EU to exploit its comparative advantage in services and, consequently, strengthen intra-EU GVCs and GVCs with non-EU countries.