metadata: authors: 0: author: Mattoo,Aaditya
1: author: Rocha,Nadia
2: author: Ruta,Michele
count: World
docna: 0: docna: The Evolution of Deep Trade Agreements
docty: Policy Research Working Paper
subtopic: International Trade and Trade Rules,Democratic Government,Public Sector Administrative & Civil
            Service Reform,Public Sector Administrative and Civil
            Service Reform,State Owned Enterprise Reform,De Facto Governments,Economics and Finance of Public
            Institution Development,Social Policy,Judicial System Reform,Legislation,Intellectual Property Rights,Regulatory Regimes,Common Property Resource Development,Legal Reform,Real & Intellectual Property Law,Legal Products,Global Environment
teratopic: Social Development,Governance,International Economics and Trade,Public Sector Development,Rural Development,Law and Development
abstracts: cdata!: This paper presents new data on the
            content of preferential trade agreements. The data contain
            detailed information on the 18 policy areas most frequently
            covered in preferential trade agreements, focusing on the
            stated objectives, substantive commitments, and other
            aspects such as transparency, procedures, and enforcement.
            Several new stylized facts emerge: (i) preferential trade
            agreements have reduced trade-weighted average tariff rates
            to less than 5 percent for more than two-thirds of
            countries; (ii) the number of commitments in preferential
            trade agreements has increased over time, particularly since
            the 2000s and in areas aiming at facilitating flows of
            services, goods, and capital; (iii) deepening commitments
            have been accompanied by an increase in regulatory
            requirements, namely on enforcement; (iv) developing
            countries tend to have fewer commitments in preferential
            trade agreements, with larger gaps in areas such as labor
            and the environment; and (v) preferential trade agreements
            are more similar within blocs, but similarity can be
            significant even across blocs. The paper also discusses the
            challenges of quantification of preferential trade
            agreements "depth" and its effects and proposes a
            research agenda for future work on trade agreements.
repnme: repnme: The Evolution of Deep Trade Agreements
display_title: The Evolution of Deep Trade Agreements
listing_relative_url: /research/2020/06/32138754/evolution-deep-trade-agreements
topicv3: State Owned Enterprises m1326323 721,Personal Property Rights m1326571 1907,Trade m1326924 698,Intellectual Property Rights m1327290 851,Environment, Natural Resources and Blue
            Economy m1327391 566
publishtoextweb_dt: 2020-06-16T00:00:00Z
historic_topic: Social Development,Governance,International Economics and Trade,Public Sector Development,Rural Development,Law and Development
origu: EFI-MTI-TIC-Trade and RI (ETIRI)
no_of_pages: 47
author_keys: 0: author_key: 429183
1: author_key: 1245806
model_extractions: Policy Research Working Paper 9283 The Evolution of Deep Trade Agreements _Aaditya Mattoo Nadia Rocha Michele Ruta_ Development Research Group East Asia and the Pacific Region, Office of the Chief Economist Macroeconomics, Trade and Investment Global Practice June 2020
Policy Research Working Paper 9283

# **Abstract**

This paper presents new data on the content of preferential trade agreements. The data contain detailed information on the 18 policy areas most frequently covered in preferential trade agreements, focusing on the stated objectives, substantive commitments, and other aspects such as transparency, procedures, and enforcement. Several new stylized facts emerge: (i) preferential trade agreements have reduced trade-weighted average tariff rates to less than 5 percent for more than two-thirds of countries; (ii) the number of commitments in preferential trade agreements has increased over time, particularly since the 2000s and in areas aiming at facilitating flows of services, goods, and capital; (iii) deepening commitments have been accompanied by an increase in regulatory requirements, namely on enforcement; (iv) developing countries tend to have fewer commitments in preferential trade agreements, with larger gaps in areas such as labor and the environment; and (v) preferential trade agreements are more similar within blocs, but similarity can be significant even across blocs. The paper also discusses the challenges of quantification of preferential trade agreements “depth” and its effects and proposes a research agenda for future work on trade agreements.

This paper is a joint product of the Development Research Group; Office of the Chief Economist, East Asia and the Pacific Region; and the Macroeconomics, Trade and Investment Global Practice. It is part of a larger effort by the World Bank to provide open access to its research and make a contribution to development policy discussions around the world. Policy Research Working Papers are also posted on the Web at http://www.worldbank.org/prwp. The authors may be contacted at amattoo@worldbank.org; nrocha@worldbank.org; and mruta@worldbank.org.

_The Policy Research Working Paper Series disseminates the findings of work in progress to encourage the exchange of ideas about development issues. An objective of the series is to get the findings out quickly, even if the presentations are less than fully polished. The papers carry the names of the authors and should be cited accordingly. The findings, interpretations, and conclusions expressed in this paper are entirely those of the authors. They do not necessarily represent the views of the International Bank for Reconstruction and Development/World Bank and its affiliated organizations, or those of the Executive Directors of the World Bank or the governments they represent._ Produced by the Research Support Team
# **The Evolution of Deep Trade Agreements**<sup>**1**</sup>

Aaditya Mattoo, Nadia Rocha, Michele Ruta World Bank, Washington DC, United States

## 1. Introduction

This paper takes a first look at new data on the content of all Preferential Trade Agreements (PTAs) that have been notified to the World Trade Organization (WTO), and highlights the emergence of Deep Trade Agreements (DTAs).<sup>2</sup> The detailed description of the data and the methodology used to collect it are discussed in the Handbook of Deep Trade Agreements (Mattoo, Rocha and Ruta, 2020) -henceforth, “the Handbook”.

DTAs are reciprocal agreements between countries that cover not just trade but additional policy areas, such as international flows of investment and labor, and the protection of intellectual property rights and the environment, among others. While these legal arrangements are still referred to as trade agreements,

> 1 This paper is based on the Introduction of the Handbook od Deep Trade Agreements (Mattoo, Rocha and Ruta, 2020). We would like to thank Petros Mavroidis for inviting us to present our work at Columbia Law School and Tom Prusa for his comments. We are highly indebted to Alvaro Espitia for providing background research for this paper and more broadly for his outstanding contribution to the production of the Handbook. Kazusa Yoshimura and Edith Laget worked on the quantification exercise using machine learning techniques in Section 4.

> 2 In the international economics and law literature, PTA is an umbrella term encompassing several types of reciprocal agreements between trading partners: Regional Trade Agreements (RTAs), Free Trade Agreements (FTAs), and Customs Unions (CUs). This definition differs from that of the World Trade Organization (WTO), which defines PTAs as agreements that grant _unilateral_ (i.e., non-reciprocal) trade preferences such as the Generalized System of Preferences schemes, under which developed countries grant preferential tariffs to imports from developing countries.

> This study, following the definition from international economics and law, uses the term PTA to refer to all types of trade agreements, both within and across regions, and uses DTA to refer to PTAs that contain provisions aimed at deepening economic integration between trading partners.
their goal is integration beyond trade or _deep_ integration. DTAs aim at establishing five “economic integration” rights: free (or freer) movement of goods, services, capital, people, and ideas. DTAs also include enforcement provisions that limit the discretion of importing governments in these areas, as well as provisions that regulate the behavior of exporters.

Preferential trade agreements have always been a feature of the world trading system but have become more prominent in recent years. The number of PTAs has increased from 50 in the early 1990s to roughly 300 in 2019. All WTO members are currently party to one, and often several, PTAs. While WTO rules still form the basis of most trade agreements, PTAs have in some sense run away with the trade agenda. Traditional trade policy areas, such as tariff reduction or services liberalization, are now more frequently negotiated in regional contexts rather than at the WTO, with PTAs often going beyond what countries have committed to at the WTO. The result is that PTAs have expanded their scope. While the average PTA in the 1950s covered 8 policy areas, in recent years they have averaged 17. In other words, there is some preliminary evidence that PTAs are becoming DTAs, both on the _intensive_ margin (specific commitments within a policy area) and the _extensive_ margin (number of policy areas covered). In this paper, we do not draw a sharp distinction between DTAs and other PTAs. Rather, the aim is to demonstrate the progressive deepening of PTAs.

Deep trade agreements matter for economic development. The rules embedded in DTAs, along with the multilateral trade rules and other elements of international economic law, such as International Investment Agreements, influence how countries (and, hence, the people and firms that live and operate within them) transact, invest, work, and, ultimately, develop. Trade and investment regimes determine the extent of economic integration, competition rules affect economic efficiency, intellectual property rights matter for innovation, and environmental and labor rules contribute to social and environmental outcomes.

It is, therefore, vital that rules and commitments in DTAs are informed by evidence and shaped more by development priorities than by international power dynamics or domestic politics. An impediment to this goal is that data and analysis on trade agreements have not captured the new dimensions of integration, which makes it difficult to identify the content and consequences of DTAs.

The new data take a first step towards filling this important gap in our understanding of international economic law and policy. It presents detailed information on the content of the 18 policy areas most frequently covered in PTAs, focusing on the stated objectives, substantive commitments, and other aspects such as transparency, procedures and enforcement. In terms of the coverage of policy areas and the granularity of information within each area, this is the most comprehensive effort to date.

The new data will inform experts and policy makers in their efforts to design, negotiate and take advantage of DTAs that promote development. This information will also enable researchers to develop indicators on the depth of trade agreements in different policy areas, assess the similarities between these arrangements, and benchmark countries’ DTAs relative to their partners. It will also help identify the rules that benefit only participants and those that have large spillover effects on non-participants or excluded countries. Finally, the new data and analysis in this study will allow researchers to identify areas where there is de facto convergence across different players, thus facilitating the adoption of commonly agreed multilateral rules.

2
This information will lay the groundwork for new research in international economics and other fields. A large body of economic literature has looked at the effects of PTAs on international trade flows and on welfare.<sup>3</sup> However, this literature has two important limitations.<sup>4</sup> On the theoretical side, the study of PTAs is mostly based on Vinerian<sup>5</sup> logic, which focuses exclusively on tariffs, thus by construction excluding deep integration issues. On the empirical side, attempts to quantify the effects of PTAs suffer from a measurement error problem, as studies generally rely on dummies to identify trade agreements or distinguish between broad categories of agreements such as FTAs or CUs. The new data will help theorists to model DTAs and help empirical economists to properly identify their effects. Beyond economics, the data will inform research in other fields, primarily international law and international relations, on important issues such as the commonality or divergence of the rules set in PTAs and how they could evolve in the future.

The new data is the result of collaboration among the World Bank, the International Trade Center (ITC), the Organization for Economic Development and Cooperation (OECD), the WTO, and experts from academic institutions. It builds on previous research by the World Bank and others. A first database on the content of deep trade agreements was published in 2017 with the goal of documenting how the policy areas covered by PTAs had increased over time (Hofmann et al. 2019). This data set allowed researchers to construct a first series of indicators which capture the scope of trade agreements; i.e., what policy areas they cover. We refer to this as the _extensive margin_ of PTA depth. Based on this first data set, several research papers then looked, respectively, at the impact of deep trade agreements on trade, global value chains, foreign direct investment, and the effect of breaking up such agreements.<sup>6</sup> The data have also been extensively employed for policy advice by the World Bank in several developing countries in Africa, Latin America, East Asia and the Balkans.

The new data that we briefly review in this paper and that are analyzed in detail in the individual chapters of the Handbook offer insights into a different dimension of PTAs depth. They capture the detailed commitments to establish and preserve the rights to economic integration, and the procedures, institutions and enforcement mechanisms that countries set up to make deep integration work. The focus is therefore not on the extensive margin of integration (number of policy areas that are covered by the agreement), but on its _intensive margin_ (the specific commitments within a policy area).

While there are a number of individual studies that have documented the deepening of PTAs in specific areas, two major data collection projects—Dür et al. (2014) and Acharya (2016)—also aimed at documenting the specific commitments for a group of policy areas covered in PTAs. Both efforts have important merits. Dür et al. (2014) covered a large set of PTAs, including those that have been notified to the WTO but are no longer in force. Acharya (2016) provided a series of databases on the content of PTAs that go beyond specific policy areas and cover emerging issues such as e-commerce or the rules on dispute settlement in PTAs. Relative to these data collection projects, the new data set is more comprehensive, both in terms of the number of policy areas covered and in terms of the information on detailed disciplines in each area.

> 3 See, e.g., Freund and Ornelas 2010, Limao 2017. 4 See, e.g., Baldwin 2010, Mattoo et al. 2017. 5 Viner 1950.

> 6 Mattoo et al. 2017, Mulabdic et al. 2017, Laget et al. 2018, Laget et al. 2019.

3
The paper is organized as follows. Section 2 describes the scope and methodology underlying the research agenda on deep trade agreements. Section 3 highlights a novel set of stylized facts that can be inferred from a first look at the new data, while Section 4 offers some insights into future applications and areas for analysis. Concluding remarks follow.

# 2. Scope and methodology

The number of policy areas covered by PTAs has increased in the last two decades. Until the late 1990s, when the number of PTAs started increasing, the majority of new agreements covered fewer than 10 policy areas. Since the 2000s, most new PTAs have covered between 10 and 20 policy areas, with some having even more than 20 (Figure O1). In a study of 28 trade agreements signed by the US and the EU, Horn et al. (2010) identify up to 52 policy areas that have been covered by at least one of the agreements. The inclusion of new policy areas in PTAs is not random. As shown in Mattoo et al. (2017), trade agreements covering few policy areas generally focus on traditional trade policy, such as tariff liberalization or customs (Table O1). Agreements with broader coverage (between 10 and 20 policy areas) tend to include trade-related regulatory issues, such as subsidies or technical barriers to trade. Finally, agreements with more than 20 provisions often include policy areas that are not directly related to trade, such as labor, environment and movement of people.

**Figure O1: Number of policy areas covered in PTAs, 1970-2017**

<!-- Start of picture text --> 25 300<br>250<br>20<br>200<br>15<br>150<br>10<br>100<br>5<br>50<br>0 0<br>More than 20 Before 10 and 20 Less than 10 Cumulative<br>Number of Agreements<br>Cumulative Number of Agreements<br>1970 1971 1972 1973 1974 1975 1976 1977 1978 1979 1980 1981 1982 1983 1984 1985 1986 1987 1988 1989 1990 1991 1992 1993 1994 1995 1996 1997 1998 1999 2000 2001 2002 2003 2004 2005 2006 2007 2008 2009 2010 2011 2012 2013 2014 2015 2016 2017<br><!-- End of picture text --> Source: Authors’ calculations based on Hofmann et al. 2019.

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individual areas helps us to identify specific policies that are the object of negotiation but may obscure cross-cutting issues—such as electronic commerce—that may be disciplined under multiple policy areas.

**Figure O2: Number of policy areas covered in PTAs, by policy**

<!-- Start of picture text --> 100%<br>90%<br>80%<br>70%<br>60%<br>50%<br>40%<br>30%<br>20%<br>10%<br>0%<br>Most common policy areas<br>Share of agreements<br>FTA Industrial FTA Agriculture Trade Facilitation and Customs Export Taxes Competition Policy Subsidies Intellectual Property Rights Technical Barriers to Trade Sanitary and Phytosanitary... Services Movement of Capital State Owned Enterprises Public Procurement Investment Visa and Asylum Environmental Laws Labor Market Regulations Agriculture Statistic Energy Research and Technology Consumer Protection Industrial Cooperation Social matters Economic Policy Dialogue Education and Training Cultural Cooperation Data Protection Health SMEs Anti-corruption Taxation Approximation of Legislation Financial Assistance Illegal Immigration Mining Regional Cooperation Information Society Public Administration Audiovisual Innovation Policies Nuclear Safety Illicit drugs Political Dialogue Terrorism Money laundering Civil Protection Human Rights<br>Antidumping and Countervailing...<br><!-- End of picture text --> Source: Authors’ calculations based on Hofmann et al. 2019.

The classification of policy areas used in Figure O2 deviates slightly from the one of Horn et al. (2010).<sup>7</sup> Specifically, for the Handbook, we decided to include rules of origin, a policy area that was absent from the Horn et al. (2010) classification, and to treat as a single policy area: (a) _trade remedies,_ which include anti-dumping and countervailing measures; (b) _investment_ , which includes the areas covered under the WTO’s Trade Related Investment Measures, or TRIMs; and (c) _intellectual property rights_ (IPR), which include the areas covered under the WTO’s Trade Related Intellectual Property Rights, or TRIPs.

Trade agreements are generally assessed in terms of the market access they create. Given the complexity of policy areas that are covered by DTAs, the metric of market access—while still important—appears inadequate. In this paper, we propose to define deep trade agreements as international arrangements that aim to regulate three (partially overlapping) sets of policy areas (Figure O3).

- First, the core policy areas included in DTAs aim to establish five economic integration rights: _free (or freer) movement of goods, services, capital, people_ and _ideas_ .<sup>8</sup> The policy areas that directly impact these flows include: (a) _tariffs and export taxes,_ which affect the movement of goods; (b) _services,_ which regulate services trade flows; (c) _investment and movement of capital,_ which affect the movement of capital; (d) _visa and asylum,_ which regulate the movement of people; and (e) _intellectual property rights,_ which influence the flows of ideas.

> 7 The Horn et al. (2010) classification was used to collect data on the extensive margin of PTA depth.

> 8 We use the words “aim to establish” rather than “establish” for two main reasons. First, DTAs may cover only a subset of integration rights. Second, provisions may not be justiciable. A contribution of the new data is to identify the extent to which integration rights are established in PTAs.

6
<!-- Start of picture text --> Trade Facilitation<br>: and Customs<br>Environmental Co tit . .<br>Laws Po Meeiitiee For protecting economic<br>os integration rights<br>Expanding preferences discretion. (limiting: togovernment undo them)<br>consumer Export Taxes .<br>. ctatelOwned Anti-dumping and<br>rights and ~ Countervailing<br>. Enterprises Duties<br>social welfare Mavementon<br>(obligations capital |<br>on exporters) \ |<br>Intellectual Visa and /<br>Property Rights asylum<br>HSerLieT Technical Barriers<br>Regulations Subsides faired<br>Aim at establishing<br>economic integration rights<br>. Sanitary and<br>rocurement<br>— Measures<br><!-- End of picture text -->
policy areas, additional information is provided at the provision level, including (a) the relationship between the coverage of the disciplines on and the corresponding regulation in the WTO; (b) the level of enforceability of each provision;<sup>11</sup> (c) whether the specific commitment can be applied discriminatorily or whether it is de facto non-discriminatory. Finally, when applicable, for example in services and government procurement, the coders included information at the sectoral level on exclusion of certain sectors from an agreement, or the applicability of an agreement to a specific industry.

The analysis covers the realm of PTAs that are in force and notified to the WTO as of end-2017. The basis of the coding analysis is the legal text of the trade agreements and the relevant annexes that accompany the agreement (and have been notified to the WTO). This approach comes with two main limitations that should be clear to the user of the database. First, the focus on the legal text of the agreement implies that secondary law (the body of law that derives from the principles and objectives of the treaties) has not been coded. This is a concern particularly when assessing the depth of integration of the EU, since in most policy areas covered in the Handbook, EU institutions have used secondary law such as regulations, directives, and other legal instruments to pursue integration.<sup>12</sup> Second, the focus on the legal text also excludes from consideration issues of implementation of the trade agreement into national laws and regulations or subsequent annexes that the parties might agree on which are not reported to the WTO. These are important areas for future research.

Despite the similarity in the coding approach, policy areas differ widely from each other. First, some policy areas are inherently more complex than others and their description requires a larger number of questions to reflect the more detailed provisions. IPR has the highest number of provisions (120), while labor has the lowest (18). Second, some policy areas focus primarily on substantive provisions: specific commitments on integration, such as market access commitments, and specific obligations such as harmonization of standards. Others tend to have a larger number of procedural provisions, such as transparency provisions and procedural requirements. Table O2 provides an overview, showing the heterogeneity across policy areas in these different dimensions and identifying the set of “substantive” provisions as those that require specific integration/liberalization commitments and obligations.

**Table O2: Number of substantive and other provisions per policy area in all PTAs notified to the WTO**

<!-- Start of picture text --> Discipline<br>Category<br>Objectives 1 1 8 1 2 2 2 2 2 2 23<br>Scope and definitions 1 16 11 7 2 17 2 4 2 1 10 8 10 91<br>Export Taxes Services Investment Movement of Capital Intellectual Property Rights Visa and Asylum Trade Facilitation and Customs Anti-dumping and Countervailing Duties Technical Barriers to Trade Sanitary and Phytosanitary Measures Public Procurement Subsidies State Owned Enterprises Competition Policy Environmental Laws Rules of Origin Labor Market Regulations Total provisions<br><!-- End of picture text --> 11 The legal enforceability of the PTA provisions is coded according to the language used in the text of the agreements. It is assumed that commitments expressed with clear, specific, and imperative legal language can more successfully be invoked by a complainant in a dispute settlement proceeding, and therefore are more likely to be legally enforceable. In contrast, unclearly formulated legal language might be related with policy areas that are covered but that might not be legally enforceable.

12 Note that the figures and tables in this paper refer to the EU as a single entity (i.e. the European Union agreement and enlargements are excluded) and report data for EU PTAs with third countries where this concern does not apply.

8
|_Transparency_|4|9|3||13|3|8|6|3|10|7|4|5|1|||**76**|
|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|
|_Substantive commitments_|17|19|13||59|3|6|2|19|20|4|3|8|11|27|20<br>12|**243**|
|_Liberalization/Integration_|_14_|_8_|_11_||_19_||_4_|_1_|_3_|_4_|_3_|||||_13_|**_80_**|
|_Conditions/Obligations_|_3_|_11_|_2_||_40_|_3_|_2_|_1_|_16_|_16_|_1_|_3_|_8_|_11_|_27_|_7_<br>_12_|**_163_**|
|_Procedural requirements_|17|8|||12|3|28|10||3|28||2|2||17|**130**|
|_Enforcement mechanism_||1|3|8|22|1||2|4||5|7|5||4|1|**63**|
|_Sectoral coverage_|2|1|2||5||||||33|9|8||||**60**|
|_Specific coverage_||2|1|13||9|||||8|2|8|1|||**44**|
|_Exceptions_|5|6|2|35|4|4||||||3|1|3|||**63**|
|_Safeguards_||1|10|31||1|||||||||||**43**|
|_Special and differentiated treatment_|||||||||||7|2|2||||**11**|
|_Institutional framework_||1|1||2|2|2|6|2|11||||2|1|2|**32**|
|_Cooperation_|||2||3|1|8||3|3|1|1|1|5|4|1|**33**|
|_Miscellaneous_|||9|||||||6|5|2|2|||1|**25**|
|**_Totalprovisions_**|**46**|**64**|**57**|**95**|**120**|**30**|**52**|**51**|**34**|**59**|**100**|**36**|**54**|**35**|**48**|**38**<br>**18**|**937**|

Source: Authors’ calculations based on Mattoo et al. (2020).

We also make an effort to identify the set of provisions within each policy area that are essential to achieve the objectives of the agreement. The provisions we refer to as “essential” comprise the set of substantive provisions plus the disciplines among procedures, transparency, enforcement or objectives, which are viewed as indispensable and complementary to achieving the substantive commitments. Non-essential provisions are referred to as “corollary.” A caveat is that this exercise is based on the experts’ knowledge and, hence, is subjective. However, this approach has the advantage of limiting the dimensionality of the data in an informed way.<sup>13</sup>

# 3. Stylized facts

A number of new stylized facts emerge from a preliminary analysis of the data. Each of the chapters in the Handbook provides a first look at the data by policy area. In this paper, we present a bird’s-eye view of the entire data set put together by the experts. Given the differences among policy areas and among provisions within each policy area, this approach presents many quantification challenges, which are discussed below. In this section, we rely on simple counts of the provisions and on coverage ratios<sup>14</sup> to investigate the evolution of the content of deep trade agreements. The underlying assumption in this approach is that deeper trade agreements imply a larger number of provisions.

As shown in Espitia et al. (2019), liberalization in PTAs has reduced trade-weighted average tariff rates to less than 5 percent for more than two-thirds of countries (Figure O4). While there are still pockets of high protection in some countries, most notably lower-income economies, PTAs have been broadly successful in committing national governments to maintaining low tariffs. Trade-weighted applied tariffs are, on average, 2.3 percentage points lower than average most-favored nation (MFN) rates, with gaps of greater than 6 percentage points for countries like Tunisia, Morocco, Bosnia and Herzegovina, Namibia and Lao PDR. So, while from an efficiency perspective, preferential tariff liberalization is inferior to nonpreferential liberalization, the commitments countries have taken in the network of preferential trade

> 13 A statistical approach on how to assess the importance of specific provisions included in the different policy areas in explaining trade outcomes is presented in section 4.

> 14 The coverage ratio is defined as the share of provisions for a policy area contained in a given agreement relative to the maximum number of provisions in that policy area or agreement.

9
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_Note:_ Coverage ratio refers to the share of provisions contained in a given agreement relative to the maximum number of provisions. European Union agreement and enlargements excluded.

While the overall number of provisions is suggestive, it can hide important elements of the evolution of deep trade agreements. First, as discussed above, some provisions imply substantive commitments while others concern broad objectives, definitions or procedural matters. Second, deep trade agreements, as defined in the Handbook, not only concern themselves with market access in goods, but also aim to establish freedom of mobility for services, capital, ideas and people, as well as regulating policy areas that have an impact on consumer and/or social welfare, such as labor and the environment. To gain a better understanding of how the commitments in PTAs have changed over time, we look at the evolution of coverage ratios by policy area.

Figure O6 shows that the coverage of _essential_ disciplines in PTAs has increased over time across all policy areas. This is most clearly the case for the policy areas aimed at facilitating the flows of goods (customs and trade facilitation), capital (investment and movement of capital) and services. IPR and movement of people (visa and asylum) also saw a steady by less remarkable increase in essential commitments over time. Along with economic integration rights, PTAs increasingly include essential commitments in policy areas that support these rights or impose obligations on exporters. The ones that appear to stand out are subsidies, competition and SOEs, areas that are either excluded from the WTO or for which reform of multilateral rules is considered difficult. Interestingly, while essential commitments in labor have largely increased in recent years, this happened to a lesser extent for provisions on the environment.

11
**Figure O6: Coverage ratios by policy area, over time**

_Note:_ Coverage ratio by policy area refers to the share of provisions for a policy area contained in a given agreement relative to the maximum number of provisions in that policy area. Years refer to entry into force date. European Union agreement and enlargements excluded.

The presumption is that the increase in the essential disciplines in deep PTAs has been driven by countries taking on more substantive commitments over time. Indeed, Figure O7 shows that this is the case, but it also uncovers interesting insights about the evolution of non-substantive commitments. We focus on the three (numerically) most relevant non-substantive provisions: procedural rules, transparency and enforcement provisions. The deepening of substantive commitments has been accompanied by an increase in the number of corollary provisions, suggesting that achieving deeper commitments may require more procedural rules for implementation, transparency, and enforcement. A second insight is that, while these disciplines are all necessary to render substantive commitments in trade agreements effective, they have evolved differently in recent years. Starting in the early 2000s, the relevance of enforcement provisions in DTAs has increased disproportionally relative to procedural and transparency provisions. The growing enforcement capacity of DTAs may help explain the success of these institutional arrangements as tools for deep integration.

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**Figure O7: Substantive provisions and a breakdown of non-substantive provisions in PTAs, over time**

<!-- Start of picture text --> 42<br>35<br>27 27<br>22<br>19 20<br>16<br>15 14 13 13<br>12<br>10 10<br>8 8<br>6 6<br>4<br>Before 1995 1995-1999 2000-2004 2005-2009 2010-2017<br>Transparency Procedural requirements Enforcement mechanism Substantive<br>Coverage ratio refers to the share of provisions for a policy area contained in a given agreement relative to the maximum<br>number of provisions in that policy area. Years refer to entry into force date. European Union agreement and enlargements<br>When we break down the trade agreements by level of development of the signatories, we observe two<br>facts. First, the deepest PTAs are those involving developed economies, followed by PTAs between<br>developed and developing economies. PTAs between developing countries are the shallowest. Indeed,<br>there is a sizeable gap between average coverage ratios for the latter group of PTAs relative to the first<br>two (Figure O8). This could reflect a focus of negotiations on tariffs and traditional trade barriers, which<br>are still high for several low-income economies. Second, in terms of composition, PTAs between<br>developed countries and those between developed and developing economies include similar shares of<br>provisions establishing economic integration rights, supporting these rights and aiming to regulate<br>exporters (Figure O9). PTAs between developing countries are shallower across the board, with a stronger<br>gap in areas such as environment and labor that aim at improving social welfare.<br>Figure O8: Inclusion of substantive commitments in PTAs, by level of development<br>27.7<br>23.2<br>18.8 18.9 19.5<br>13.2 13.9 13.7<br>10.9<br>10.1<br>8.4 8.2 9.1<br>5.8<br>4.8<br>Before 1995 1995-1999 2000-2004 2005-2009 2010-2017<br>Developing - Developing Developing - Developed Developed - Developed<br>Average coverage by category (%)<br>Average coverage ratio (%)<br><!-- End of picture text --> _Note:_ Coverage ratio refers to the share of provisions for a policy area contained in a given agreement relative to the maximum number of provisions in that policy area. Years refer to entry into force date. European Union agreement and enlargements excluded.

When we break down the trade agreements by level of development of the signatories, we observe two facts. First, the deepest PTAs are those involving developed economies, followed by PTAs between developed and developing economies. PTAs between developing countries are the shallowest. Indeed, there is a sizeable gap between average coverage ratios for the latter group of PTAs relative to the first two (Figure O8). This could reflect a focus of negotiations on tariffs and traditional trade barriers, which are still high for several low-income economies. Second, in terms of composition, PTAs between developed countries and those between developed and developing economies include similar shares of provisions establishing economic integration rights, supporting these rights and aiming to regulate exporters (Figure O9). PTAs between developing countries are shallower across the board, with a stronger gap in areas such as environment and labor that aim at improving social welfare.

_Note:_ Coverage ratio refers to the share of provisions for a policy area contained in a given agreement relative to the maximum number of provisions in that policy area. Years refer to entry into force date. European Union agreement and enlargements excluded.

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# **Figure O9: Coverage ratio by type of policy and level of development**

<!-- Start of picture text --> 26.0<br>23.5<br>22.4 22.1<br>20.8 20.7<br>11.9<br>9.5<br>4.9<br>Establishing Integration Rights Protecting Integration Rights Expanding Consumer Rights<br>Developing - Developing Developing - Developed Developed - Developed<br>Average coverage ratio (%)<br><!-- End of picture text --> _Note:_ Coverage ratio refers to the share of provisions for a policy area contained in a given agreement relative to the maximum number of provisions in that policy area. Years refer to entry into force date. European Union agreement and enlargements excluded.

We next analyze the depth of trade agreements by country. Here, we focus on the substantive commitments.<sup>15</sup> As several countries have multiple agreements with different levels of depth, we present the average number of substantive commitments per country in panel a of Figure O10 and the maximum number in panel b of Figure O10. The main takeaway is that developing countries in Sub-Saharan Africa, Middle East and North Africa, South America, South Asia and, to a lesser extent, East Asia tend to have fewer substantive commitments in trade agreements relative to advanced economies. The few exceptions include countries in South America that are signatories of the Pacific Alliance and other developing economies that have signed deep trade agreements with an advanced trade partner, such as Mongolia with Japan and Caribbean countries with the EU. In terms of depth as measured here, North America and Europe are the most integrated regions, through NAFTA and its successor agreement, and through the agreements the EU has signed with neighboring countries. East Asia is a region with a mixed profile: the network of ASEAN agreements includes most countries but tends to have fewer substantive commitments relative to North America and Europe, except for some countries such as Vietnam, which have signed onto the Comprehensive Agreement for the Trans-Pacific Partnership (with a coverage ratio of 61 percent).

# **Figure O10:  Substantive provisions in PTAs by country**

> 15 Appendix Tables O1 and O2 provide other indicators by PTA and by country.

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of counting disregard the fact that DTAs cover multiple policy areas and sectors and that the “value” of each provision is unlikely to be the same even within the same policy area.

In some cases, it may be possible to construct a hierarchy of measures. For example, in the areas of services and government procurement, provisions could be divided into three tiers. Tier 1 would comprise provisions ensuring market access and national treatment at entry. Tier 2 would comprise provisions on post-entry operation; e.g., preferences or offsets. Tier 3 would comprise procedural rules limiting discretion in licenses and awards. The construction of an index could then be lexicographic, in that we would consider first only differences between countries or sectors in Tier 1 and move to subsequent tiers only to break ties. Such an approach is ideally suited to the construction of an ordinal rather than cardinal (i.e., qualitative rather than quantitative) measure.

A pragmatic approach to overcoming some of the constraints to constructing representative indices is to rely on experts’ judgment. This is the method adopted in the Handbook. The individual chapters offer a disaggregated set of stylized facts for each policy area using count variables, coverage ratios and the individual assessment of the authors of the key provisions in each policy area. We have already discussed the distinction between substantive and essential provisions. Some chapters go even beyond these categories. For instance, the chapter on SOEs (Rubini and Wang, 2019) identifies four commitments concerning issues of ownership, discrimination, subsidization and anti-competitive behavior as key. The chapter on technical barriers to trade (Espitia et al. 2019) identifies a subset of seven commitments which are key to achieving deep integration in the area of technical regulations. This type of information can be used in the estimation exercises we discuss below, as it allows the researcher to address problems associated with large numbers of possible variables at hand, such as multicollinearity (i.e., the high correlation between the different provisions within and across policy areas).

# _Indirectly estimated measures_

These measures are obtained by estimating the impact of the provisions on a variable of interest. For example, we could infer the value of individual provisions by estimating their impact on bilateral trade, controlling for other influences. In principle, each binary element in the relevant DTA areas could be included in a country-product import regression as a right-hand variable while controlling for applied policies, including tariffs and non-tariff measures. Similar methods have been used to estimate the Overall Trade Restrictiveness Index.<sup>16</sup> However, even for trade in goods we have limited degrees of freedom, and in other areas (such as services), we do not have sufficiently fine outcome data. In these areas, it may be necessary to take a hybrid approach, based on first constructing more aggregated indices.

Another approach to quantify the effects of DTAs and build indicators of depth is to use new statistical methods. As a first example, we employ machine learning techniques to detect the influential variables/provisions in DTAs for trade.<sup>17</sup> Machine learning is a generic term referring to a wide variety of algorithms which detect a certain pattern from a large data set, often referred to as “Big Data,” and make predictions based on that pattern. In this case, we use a method called Random Forest (RF) to calculate

> 16 Kee, Nicita and Olarreaga, 2009.

> 17 This exercise has been carried out in collaboration with Kazusa Yoshimura and Edith Laget. Parallel work by Breinlich et al. (2020) also uses machine learning techniques to precisely quantify the impact of individual provisions in trade agreements on trade flows.

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the importance of each variable/provision for international trade flows.<sup>18</sup> Specifically, we run as a first step a structural gravity model with the standard set of fixed effects and then use the residuals as the lefthand variable in the RF.

Figure O12 shows the boxplot of scores calculated by the RF of variables/provisions in PTAs belonging to the 17 (non-tariff) policy areas analyzed in the Handbook.<sup>19</sup> The areas are colored according to their categorization into the three main groups illustrated in Figure O3; red indicates policies that establish economic integration rights, blue is assigned to those supporting these rights, and green to those that promote welfare. Each box shows the range of the first (25 percent) and third (75 percent) quartiles, and the black line in the box shows the median of the scores. The vertical lines extending from the box indicate the variability outside the above quartiles, and the dots outside the lines are regarded as outliers. Boxplots are ordered according to the magnitude of the median.

Focusing on the entire set of PTAs, we find that provisions such as investment, subsidies, and services, and to a lesser extent, rules of origin and movement of capital have a median score above the overall score average, suggesting that these policy areas are good predictors of bilateral trade, after controlling for the usual gravity determinants of trade flows. Provisions in policy areas such as SPS, environmental laws, and visa and asylum are located at the other extreme of the distribution of median scores, suggesting a more limited role in predicting bilateral trade flows. The size of the boxes and the vertical lines also indicate that there are policy areas such as movement of capital and IPR for which the contribution to trade is more or less uniform across provisions. For other policy areas such as competition policy and SOEs, there is more heterogeneity within provisions in terms of their contribution to trade.

> 18 RF is a frequently used machine learning algorithm that predicts a Y variable by combining the results from hundreds of regression/classification trees. It has the merit of not imposing a linear relationship between the Y and X variables, which is an advantage when analyzing the impact of a highly heterogenous set of variables, such as the provisions in PTAs.

> 19 A score should not be interpreted as a coefficient in a regression analysis. It measures how much the accuracy of the prediction for Y gets worse if the particular X variable is randomly permuted.

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## _Quantification challenges: Some analytical issues going forward_

Looking ahead, there is a need for stronger analytical underpinnings for any quantification exercise. Ideally, the “value” of a commitment must be evaluated in light of the objective that the provision or the deep trade agreement is trying to achieve. In other words, depth indicators could use different weights depending on whether the outcome variable is market access, welfare or another metric. For trade policy, market access may seem to be the most obvious metric, but for intellectual property rights, welfare may be the more relevant. In still other areas, such as competition policy, both might be relevant: the market access measure would include only provisions restricting barriers to foreign entry and operation while the welfare measure would include provisions requiring action against anti-competitive behavior affecting consumers.

One indicator cannot provide a measure of both the trade distortions a country imposes on its trading partners (market access) and the trade distortions a country imposes on itself (welfare). For a market access-based measure in the goods context, the relevant question could be: what is the uniform tariff that if imposed on home imports instead of the existing structure of protection would leave aggregate imports at their current level? And for a welfare-based measure: what is the uniform tariff that if applied to imports instead of the current structure of protection would leave home welfare at its current level? The relationship between the two measures is likely to vary across policy areas: positive correlation for tariffs; perhaps negative for environmental standards; and ambiguous for intellectual property rights.

A further issue relates to whether we should be interested in what legal commitments do to the level of a policy or to its variance. Provisions such as the elimination of tariffs, or of a national treatment rule in services or government procurement, fix the level of protection at zero. Provisions which legally bind policy (e.g., the permissible levels of fees, subsidies or preferences) truncate the distribution of possible policy outcomes by reducing the variance and hence the expected level of protection. Provisions which reduce discretion, such as rules on customs valuation, licensing or procurement procedures, narrow the distribution of possible policy outcomes.

Finally, we also need to consider whether we should assess agreements per se or agreements relative to applied policies. If we have the relevant data, the mean and variance shift would ideally be assessed relative to the prevailing policy (and not just the law or policy on paper but how it is implemented). For example, a legal binding tariff at 10 percent might have a different value depending on whether the existing tariff was 5, 10 or 20 percent. The creation of new databases on applied policies in goods and services trade may facilitate such analysis.

# 5. Conclusions

The _World Development Report 2009_ made the case that “thicker” borders between countries hurt economic growth, especially in developing countries. Policies that directly or indirectly restrain the international mobility of goods, services, capital, people and ideas limit, among other things, the scale of the market, which is vital for development.<sup>20</sup> Deep trade agreements aim at establishing the rights of economic integration, protecting these rights from importing governments’ actions that could undo them, and regulating actions of exporters that can have negative welfare effects. These agreements have

> 20 World Bank 2009.

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developed over time into a key institutional mechanism for countries to overcome the constraints to economic development created by the thick borders that fragment markets.

Of course, deep integration is not an end in itself. First, countries at different levels of development may have different institutional needs, and trade agreements still need to strike the right balance between rules in PTAs and the needed discretion at the national level to pursue desirable social objectives. Second, while many deep provisions may be de facto non-discriminatory and apply to members and non-members alike, there is still a tension between the proliferation of regional approaches and multilateral rules enshrined in the WTO. Therefore, from the perspective of both economic development and global governance, the efficient set of rules in DTAs is an empirical question.

The wealth of information on the content of the policy areas commonly included in PTAs could provide new impetus to the analysis on the determinants and impact of deep trade agreements. Such analysis would also provide the necessary tools to further understand the opportunities and challenges that countries face in terms of negotiation and implementation of deep trade agreements.

We suggest three areas of work going forward. A first step is to improve the measurement of the depth of trade agreements and quantification of its effects. Beyond simple count variables and coverage ratios, more work will be needed to develop new analytic methods to overcome the challenges discussed in the previous section. As shown, machine learning techniques may provide a useful innovative approach. Second, the detailed information at the level of individual policy areas could inform a series of studies to assess how specific provisions impact trade and other relevant economic variables. As trade policy experts well understand, the devil is often in the details. Finally, the new data and analysis could provide essential information to policy makers on priorities for the negotiation and implementation of trade agreements: finding what potential partners include in their trade deals, identifying best practices in DTAs and areas where practices diverge or overlap across different players, and assessing gaps between international commitments and domestic legislation.

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