Deep Trade Agreements and Development Heterogeneous Effects Staggered Difference-in-Differences 2000-2023

Abstract

Contemporary trade governance is marked by an increasing number of Deep Trade Agreements (DTAs); however the developmental implications for emerging economies are subject to some level of contestation due to the existence of methodological biases and a lack of consideration of heterogeneity. This is an investigation that addresses four key deficiencies: (1) the bias of staggered Difference-in-Differences (DiD) designs is overcome using a multi-estimator strategy (Callaway & Sant'Anna 2021; Borusyak, Jaravel, & Portal 2021); (2) triple heterogeneity, which encompasses DTA type, depth and domestic institutional capacity, is systematically addressed; (3) institutional thresholds are estimated instead of postulated; (4) inclusive growth implications are taken into consideration beyond aggregate trade indicators. Empirical analysis of a panel consisting of 140 developing economies between the years 2000-2023 has shown that DTAs have led to an increase in exports by 12.7-14.2 per cent and foreign direct investment (FDI) by 2.3-2.5 percentage points and a decline in the Human Development Index (HDI) in rural areas by 0.7-0.8 per cent. The size of increases is about 2.3 times greater for countries that cross a Rule-of-law threshold of -0.5 on the World Governance Indicators scale. North-South deep agreements have the highest export benefits (28.2 percent growth). Vertical depth (i.e. granularity of commitments in core policy categories) outperforms horizontal depth (i.e. simple count of policy areas) in terms of manufacturing productivity and including labor standards in DTAs reduce rural-urban disparities by 50 per cent. Reduction of Trade Policy Uncertainty (TPU), instrumented on the number of veto players in partner governments, is the main channel, representing 33 per cent of the total effect. These findings recognize the need to align DTA accession with domestic institutional reforms and consciously draw policies to design inclusive policies to achieve equitable development gains.