metadata: authors: 0: author: Hollweg,Claire Honore
1: author: Rocha Gaffurri,Nadia Patrizia
count: Brazil
docna: 0: docna: GVC Participation and Deep Integration in Brazil
docty: Policy Research Working Paper
subtopic: International Trade and Trade Rules,Food & Beverage Industry,Plastics & Rubber Industry,Agribusiness,Textiles, Apparel & Leather Industry,Pulp & Paper Industry,Common Carriers Industry,Business Cycles and Stabilization Policies,Industrial and Consumer Services and Products,Transport and Trade Logistics,Food Security
teratopic: Industry,Transport,International Economics and Trade,Agriculture,Macroeconomics and Economic Growth
abstracts: cdata!: The production of export goods has
            become increasingly unbundled, and countries positioning to
            become more integrated in the global economy are
            increasingly looking toward global value chains. This paper
            uses the Organisation for Economic Co-operation and
            Development/World Trade Organization's Trade in Value
            Added Database to assess Brazil's current integration
            in global value chains. It uses a structural gravity model
            estimated with parts and components to analyze the scope for
            Brazil to increase global value chain–related trade. One
            avenue to raise participation in global value chains is
            through (deeper) preferential trade agreements, and to this
            end the paper characterizes the level of integration of
            Brazil's current preferential trade agreements. Brazil
            has witnessed high growth in total domestic value added
            embodied in gross exports since 1995, yet it exhibits lower
            international engagement in global value chains, but tends
            to be stronger as a seller than a buyer. Most of the
            participation on the selling side comes from indirect
            linkages with domestic input sectors, and services sectors
            have been important for growing the indirect value added in
            global value chain–oriented exports. A deep integration
            agenda focusing not only on border measures, but also on
            beyond-the-border measures, would help Brazil to maximize
            the benefits from participation in global value chains.
            Other than its natural partners, Brazil should integrate
            with countries where global value chains are taking place.
            New agreements signed by Brazil and Mercosur with other
            regional members such as the Pacific Alliance should also
            take into consideration provisions such as investment,
            competition policy, and intellectual property rights, which
            are demonstrated to be very important for integration in
            global value chains.
geo_reg_key: 119228,517191
repnme: repnme: GVC Participation and Deep Integration in Brazil
display_title: GVC Participation and Deep
            Integration in Brazil
listing_relative_url: /research/2018/11/30609210/gvc-participation-deep-integration-brazil
topicv3: Industrial Clusters and Value Chains
            m1326062 1226,Agribusiness m1326087 1058,Agriculture and Food Security m1326205 435,Global Value Chains(GVC) m1326472 767,Trade m1326924 698
publishtoextweb_dt: 2018-11-13T00:00:00Z
historic_topic: Industry,Transport,International Economics and Trade,Agriculture,Macroeconomics and Economic Growth
no_of_pages: 44
author_keys: 0: author_key: 1183206
1: author_key: 995092
model_extractions: WPS8646 Policy Research Working Paper 8646 GVC Participation and Deep Integration in Brazil _Claire H. Hollweg Nadia Rocha_ Macroeconomics, Trade and Investment Global Practice November 2018
Policy Research Working Paper 8646

# **Abstract**

The production of export goods has become increasingly unbundled, and countries positioning to become more integrated in the global economy are increasingly looking toward global value chains. This paper uses the Organisation for Economic Co-operation and Development/ World Trade Organization’s Trade in Value Added Database to assess Brazil’s current integration in global value chains. It uses a structural gravity model estimated with parts and components to analyze the scope for Brazil to increase global value chain–related trade. One avenue to raise participation in global value chains is through (deeper) preferential trade agreements, and to this end the paper characterizes the level of integration of Brazil’s current preferential trade agreements. Brazil has witnessed high growth in total domestic value added embodied in gross exports since 1995, yet it exhibits lower international engagement in global value chains, but tends to be stronger as a seller than a buyer. Most of the participation on the selling side comes from indirect linkages with domestic input sectors, and services sectors have been important for growing the indirect value added in global value chain–oriented exports. A deep integration agenda focusing not only on border measures, but also on beyond-the-border measures, would help Brazil to maximize the benefits from participation in global value chains. Other than its natural partners, Brazil should integrate with countries where global value chains are taking place. New agreements signed by Brazil and Mercosur with other regional members such as the Pacific Alliance should also take into consideration provisions such as investment, competition policy, and intellectual property rights, which are demonstrated to be very important for integration in global value chains.

This paper is a product of 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/research. The authors may be contacted at nrocha@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
# GVC Participation and Deep Integration in Brazil

Claire H. Hollweg Nadia Rocha<sup>1</sup>

**Keywords:** Global value chains, gravity model, trade agreements, deep integration **JEL classification codes:** F12, F13, F6

1 Claire H. Hollweg and Nadia Rocha are Senior Economists in the Trade and Regional Integration Unit, Macroeconomics, Trade and Investment Global Practice, World Bank Group. The corresponding author can be contacted at nrocha@worldbank.org. We thank Erik van der Marel, Alvaro Espitia and Alberto Osnago for useful inputs, and Jose Guilherme Reis, Mark Dutz, and Daria Taglioni for valuable comments. The findings, interpretations, and conclusions expressed in this paper are those of the authors and do not represent the views of the World Bank, its Executive Directors, or the countries they represent.
<!-- Start of picture text --> S 40% -<br>J<br>=<br>5 30% -<br>4<br>s<br>2 20% -<br>coal<br>o><br>2 10%-<br>s<br>=<br>2 om%-<br>-—<br>e<br>8 -10% -<br>¢<br>9<br>-<br>£ -20% -<br>=<br>B -30% -<br>=<br>S -40% -<br>2008 2010 2012 2014<br>|| Brazil World Average<br><!-- End of picture text -->
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|||Simple|mean||
|---|---|---|---|---|
||Intermediate<br>goods|Consumer<br>goods|Capital<br>Goods|Teel|
|Brazil|8,09|16,66|16,33|13,74|
|China|6,79|11,34|7,77|7,57|
|Russia|5,11|9,70|6,02|6,84|
|SouthAfrica|2,15|8,58|2,48|6,25|
|Argentina|8,00|15,36|12,89|12,58|
|Colombia|4,13|11,06|4,26|5,15|
|US|1,37|3,03|1,19|2,73|
Section 2 of this paper characterizes Brazil’s current insertion in GVCs using measures of trade in value added. It identifies Brazil’s position in GVCs across four GVC‐intensive sectors where Brazil is internationally competitive: agribusiness, basic metals, automotive and chemicals. It also provides a snapshot of Brazil’s competitiveness vis‐à‐vis other comparator countries, which include: Colombia, Indonesia, Mexico, Turkey, Argentina, South Africa, Thailand and Canada.<sup>2</sup> It then assess scope to increase participation through trade in intermediate products (relative to final goods) using a gravity model.

Section 3 discusses the benefits that deep integration has in terms of GVCs participation. It also provides an analysis of the patterns and characteristics of integration through deep Preferential Trade Agreements (PTAs) and highlights where Brazil stands with regards to different aspects of deep integration. The section also presents some recent results on the positive impact of deep integration on GVC‐related trade and tries to assess the reasons why Brazil has not fully benefitted, in terms of GVC participation, from its Preferential Trade Agreements.

2. Characterizing Brazil’s current insertion in global value chains Value added trade<sup>3</sup> Brazil experienced high growth in the domestic value added embodied in exports through 2011. In a world of GVCs, the focal issue of analysis and what ultimately matters for economic development is the growth of a country’s domestic value added embodied in exports. This is because gross exports most likely have a large component that consists of value added brought in from abroad through intermediate input imports. This indicator captures economic upgrading in GVCs. The total domestic value added embodied in Brazil’s exports has been growing steadily since 1995, achieving an average annual growth rate of 10.7%. Brazil’s performance was above most of the selected comparators, and only Colombia showed slightly higher growth rates of value‐added embodied in gross exports (11%).

Brazil’s performance differs substantially across sectors, including those that are important for Brazil’s participation in GVCs. The selection of sectors that we will investigate Brazil’s GVC performance are those GVC‐intensive sectors in which Brazil is relatively competitive.<sup>4</sup> The data support that Brazil is most competitive in agribusiness (excluding primary agriculture), wood and paper, basic metals and the automotive industry. Brazil also performs relatively well in the chemicals sector, and since this sector in Brazil is one of the largest in the world, we selected it

> 2 These comparators were selected based on similarities in size (GDP and population) and economic development (GDP per capita). They include South Africa, another emerging economy within the BRICS that is commodity dependent, as well as other large regional economies including Mexico, Colombia and Argentina. Thailand and Canada were selected as aspirational countries, and Indonesia as a comparator outside the region that is also integrating into GVCs.

> 3 This analysis is based on van der Marel, E. (2016), “Making GVCs Work for Development: The case of Brazil,” mimeo. 4 We use the indicator of revealed comparative advantage (RCA) based on domestic value added (as opposed to gross terms) to assess Brazil’s relative strength of the sectors in which its relative competitiveness is high. The RCA measures are presented in Table A1 in the appendix.

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in place of the wood and paper industry. The remainder of this section analyzes Brazil’s GVC performance in these four GVC‐intensive sectors.

The growth in domestic value added embodied in exports for Brazil has been greatest in the automotive sector, together with chemicals but lags behind some of Brazil’s peer countries. Figure 3 presents the average annual growth rate of domestic value added embodied in gross exports between 1995 and 2011 in each of the four GVC sectors. Although Brazil’s average annual growth rate is high in automotive (14.2%), it lags behind some of its comparators. Turkey, Indonesia and Thailand have much higher growth rates than Brazil. Turkey is a relatively strong performer in automotive industry. The good performance of Turkey is likely to be linked to its proximity to the large GVC market, namely the EU. Similarly, for Mexico which is relatively close to the US market of the automotive GVCs, growth rates are high, though not as high as Brazil’s. GVC participation is doing relatively well compared to comparator countries in agribusiness (10.9%) and chemicals (13.6%), where Brazil has seen high growth rates of domestic value added embodied in gross exports.

The growth rates are much higher in Brazil than Canada, a country that shows very low levels of growth in the GVC sectors for which Brazil is competitive. In agribusiness, Brazil shows high growth rates together with Indonesia while Canada is showing low levels of value‐added growth in this sector. Canada has higher growth rates in basic metals which are somewhat closer in line with Brazil.

**Figure 3: Growth of domestic value added embodied in gross exports, by sector (1995‐2011)**

<!-- Start of picture text --> Agribusiness Metals<br>BRA 10.9 BRA 10.3<br>IDN 13.4 COL 24.6<br>MEX 10.4 IDN 19.2<br>ARG 9.2 THA 15.6<br>COL 7.5 MEX 11.5<br>TUR 6.8 ARG 10.9<br>CAN 6.0 TUR 9.2<br>THA 5.8 CAN 7.9<br>ZAF 3.2 ZAF 5.7<br>Automotive Chemicals<br>BRA 14.2 BRA 13.6<br>IDN 20.7 THA 16.3<br>THA 18.2 IDN 14.2<br>TUR 16.7 ARG 9.6<br>ARG 12.4 TUR 8.0<br>COL 12.4 COL 7.8<br>ZAF 11.6 CAN 6.6<br>MEX 9.4 MEX 6.1<br>CAN 0.2 ZAF 5.3<br><!-- End of picture text --> 6
# **Source:** Authors’ calculations using OECD/WTO TiVA.

The domestic value added expressed as a share of gross exports is very high in almost all sectors in Brazil, but particularly in agribusiness. There has been a decline in the share of exported value added in gross exports over time – for Brazil as well as most comparator countries across all four GVC‐intensive sectors – which is consistent with greater GVC participation (Appendix Figure A1). In GVCs, countries must import to export. But what ultimately matters is the ability of a country to leverage GVC participation to increase its domestically exported value added. And Figure 3 has highlighted that Brazil has seen robust increases in exported domestic value added in all sectors over time. Canada exhibits low shares across all four GVC‐intensive sectors.

Conversely, Brazil shows relatively low shares of foreign value added in exports as a share of gross exports, especially in agriculture. This may reflect low international participation in GVCs as a buyer across sectors, or being positioned upstream in the sector. The foreign value added embodied in gross exports captures the country’s GVC position as a user of foreign value‐added in its exports. For instance, worldwide this share is around 20% which means that one‐fifth of gross exports constitute value that was added in a foreign country. Overall, this share has over the years been increasing the fastest for emerging countries. In addition, it is expected to be somewhat lower for larger countries. As a reflection of Brazil’s high share of domestic value‐ added exports in gross exports, it shows relatively low levels of foreign value‐added in its gross exports (Appendix Figure A2). This is especially true for the agribusiness sector, where foreign value added represents 9.8% of gross export value in 2011. This has nonetheless increased, showing signs of increased GVC participation as a “buyer” of intermediate inputs which are processed domestically for Brazil’s exports. The foreign value‐added share in gross exports is highest for Brazil’s automotive sector, which has also substantially grown over the years to up to 19.9% in 2011. Both the metal and chemical sectors show a share of 15.8% in 2011.

All sectors, however, show a relatively low foreign value added share compared to peer countries. For instance, Brazil has the lowest share of foreign value added in gross agribusiness exports, and other countries including Turkey, Colombia and Argentina exhibit higher shares. This is particularly true for Canada (20.6%). Of note, foreign value‐added exports are important as they could indicate spill‐over effects or “learning” effects from foreign suppliers of which their inputs are processed further downstream in the value‐chain for exports. As such, there is ample scope for Brazil to further integrate in GVCs as a buyer in the four sectors in which it already exhibits high comparative advantage.

Brazil’s total domestic value added embodied in gross exports is generated directly by export‐ oriented sectors, as much as it is generated indirectly through domestic suppliers to exports. The importance of direct domestic value added has also been declining in Brazil. Domestic value added (embodied in gross exports) can be broken down into (a) value added produced within the industry itself (i.e. direct), (b) value added created in other domestic supplying sectors or industries (i.e. indirect), and finally (c) domestic value added which is re‐imported through intermediates. This indirect part is comprised of Brazil’s intermediate input production that is produced domestically, and is exported in other goods in which these intermediate inputs are embodied. It is interesting to note that Brazil’s direct export share of domestic value added embodied in exports is as large as its indirect exports share. Brazil has seen a slight decrease of 7
the direct domestic value added embodied in gross exports over the years 2009‐2011, from 54.4% to 50.6%.

This is somewhat different compared to Brazil’s peer countries. For instance, Argentina shows higher direct value added in exports in 2011, of around 55.1 percent whereas its indirect value added in exports was 44.9 percent and which has been stable compared to 1995. For Canada this pattern is also reversed, and to a higher extent.

In GVC sectors, however, the domestic direct value‐added share generated through exports is more modest, and has also been decreasing (Figure 4). For instance, in agribusiness the direct share in 2011 reached almost 25%, but had declined from as share in 1995 of 31.1%. For metals, the direct share in 2011 was 39.2% but was much higher in 1995 where it had a direct share of 51.2%. The automobile sector has more or less stabilized its direct share although slightly decreased as well from 27.2% in 1995 to 24.3% in 2011. Finally, the chemical sector has seen a direct share decline from 46.5% in 1995 to 32.4% in 2011. This all means that, conversely, Brazil’s indirect share in all four sectors has increased throughout these years as the re‐imported value‐ added share is minimal.

Figure 4: Decomposition of domestic value added embodied in gross exports, by sector (2011) <!-- Start of picture text --> Agribusiness 2011 BRA Metals 2011 BRA<br>0.1% 0.1%<br>24.9%<br>39.2%<br>60.7%<br>75.0%<br>Direct Indirect Re-imported Direct Indirect Re-imported<br>Automotive 2011 BRA Chemicals 2011 BRA<br>0.2% 0.1%<br>24.3%<br>32.4%<br>67.5%<br>75.5%<br>Direct Indirect Re-imported Direct Indirect Re-imported<br><!-- End of picture text --> Source: Authors’ calculations using OECD/WTO TiVA.

The direct shares in other countries continue to be higher than in Brazil across the GVC sectors. In short, for Brazil the indirect supplying industries play a relative larger role in generating 8
domestic value added through exports than in peer countries, where Brazil’s gross exports rely more on indirect value added from the domestic supplying sectors. For example, Argentina shows much higher direct shares in metals and chemicals in 2011, 49.7% and 50.4% respectively. Argentina’s agribusiness and automotive sectors have lower shares of direct value‐added of 31.9% and 33.2%, respectively, though still above Brazil. In Canada, although the direct share is also lower than the indirect share in all sectors apart from chemicals (which has a share of 52.6 percent in 2011), the direct share is still tends to be greater than Brazil. In 2011, the metal sector in Canada has a direct share of 33.8%; the automotive sector 43.6%; and the agribusiness sector 42.6%.

Firm‐level analysis could shed light on factors underlying these observations, and the appropriate policy responses. For example, a low direct value added share may reflect lagging international competitiveness in the export sector, which could be underpinned by specific policies. For example, high import tariffs on main inputs such as capital goods may be an impediment to exporting value added. Alternatively, high tariffs on capital could be preventing technology absorption. There are many factors that impact countries’ success in GVCs, including having access to a large regional or domestic market – which Brazil has – and good connectivity with the centers of technology. Being integrated in value chains as a buyer of inputs that embed foreign technology is important for firms’ ability to export domestic value added. Import tariffs on other intermediate inputs would also bias domestic input sourcing, and lead to a higher share of indirect domestic value added. These hypotheses could be further tested with firm‐level data.

The internationalization of production and subsequently trading in the GVC also requires attention to the role of services. Next to the fact that many services are used as inputs into the production of GVC goods, they are also essential in the smooth operation of the GVC so as to connect the different production sides across borders. A clear example is logistics services. Recent analysis in the trade literature revealed that services carry along a higher amount of value added in manufacturing than previously thought, namely around 30%. On the whole, high‐ income countries use more services as a supplying industry in their manufacturing goods than poorer countries. Yet, this does not mean that poorer or emerging countries have no leverage to exploit services in their GVCs. On the contrary, since services carry along higher value added and since a typical emerging country has a sizable domestic services market, a country such as Brazil would be able to capitalize on using services as forward linkage in its GVCs.

Brazil uses a relatively high share in services value added for agribusiness exports, and a relatively low share for metals exports. Figure 5 shows that for all four selected GVC sectors in Brazil, the distribution sector represents the largest share of the total value added generated through services. These represent the forward linkages of services (services which are carried forward in terms of value added into other downstream sectors’ exports within Brazil’s economy). For example, in agribusiness, distribution services represent 15.4% of total domestic value added embodied in gross exports in 2011. This is not entirely surprising as this sector makes extensive use of the domestic distribution network. Other relatively important services inputs that create value added are finance and the business services sector. The share of financial services in domestic exported value added is highest in the agribusiness sector. On the other hand, business services play a more important role in the exports of chemicals and automotives (8.7% and 8.8%, 9
respectively). The higher use in these services is likely reflecting the relatively higher level of sophistication of chemicals and automotive exports, but also the higher level of sophistication of business services. This is because business services themselves create higher value‐added.

Figure 5: Services share of value added in manufacturing sectors gross exports (2011) <!-- Start of picture text --> Agribusiness 15.4 2.7 3.50.6 5.7<br>Chemicals 10.7 2.2 4.70.9 8.7<br>Automotives 8.1 2.1 5.80.9 8.8<br>Metals 7.7 2.4 4.40.8 4.8<br>0 10 20 30<br>Wholesale & Reta il Transport & Storag e Finance<br>Computer R&D & Business<br><!-- End of picture text --> Source: Authors’ calculations using OECD/WTO TiVA.

Compared to peer countries, Brazil shows stronger forward linkages in services from sectors such as distribution and R&D/business services. Across all sectors and compared to most of its comparator countries, Brazil shows high levels of domestic value added from distribution and business services to GVC sectors (Figure 6). In agribusiness and in chemicals, Brazil has the highest share in domestic value‐added from distribution services across its peer countries. Transport services on the other hand have low contributions to GVC value‐added exports in each of these sectors in Brazil compared to peer countries. Interestingly, the forward linkages of business services in value‐added in these four sectors in Brazil does relatively well. For instance, although the share is still relatively low in agriculture, it is nonetheless highest compared to other countries, including Canada. This is also true for metals, automotives and chemicals in which the services value‐added from business services is highest compared to other countries. By similar token, the use of financial services by all GVC sectors also performs relatively well compared to other countries.

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Figure 6: Domestic value‐added of services in comparative advantage sectors (2011) <!-- Start of picture text --> Agribusiness Metals<br>BRA MEX CAN ZAF TUR COL IDN ZAF BRA CAN MEX TUR COL IDN<br>Distribution Transport Finance R&D / Business Distribution Transport Finance R&D / Business<br>Automotives Chemicals<br>ZAF BRA CAN TUR MEX COL IDN BRA MEX ZAF TUR CAN COL IDN<br>Distribution Transport Finance R&D / Business Distribution Transport Finance R&D / Business<br>15 8<br>6<br>10<br>4<br>5<br>2<br>0 0<br>10<br>10<br>8<br>8<br>6<br>6<br>4 4<br>2 2<br>0 0<br><!-- End of picture text --> Source: Source: Authors’ calculations using TiVA.

Position of Brazilian companies in GVCs Brazil’s lower international engagement concerning GVCs is reflected when looking at the entire “chain” of the production lines in each of the selected sectors. The so‐called length of the GVC takes stock of the fact that multiple countries take part in the production chain. For analyzing this length of the chain, a measure called the average (upstream) number of production stages is used. It is constructed as a recursive measure of importing on the sourcing side of exports (I2E), as developed by Fally (2011) and applied to a large set of countries by Backer and Miroudot (2012).

To illustrate the concept, consider a simple hypothetical value chain where the electronics industry in the United States requires 40 cents of parts and components from Taiwan, China, for each dollar worth of electronic devices produced (the other 60 cents being value‐added brought in by the US‐based electronics industry). Assuming that Taiwanese parts are 100 percent Taiwanese value‐added, the length of the chain is 1+0.4=1.4 (1 for the United States and 0.4 for Taiwan, China). The concept becomes recursive in more complex examples. For instance, if the 40 percent of value‐added sourced from Taiwan, China, instead included parts made in Japan, the chain would be longer. Assuming that Japanese parts are 100 percent Japanese value‐added, and make up 30 percent of the value of the Taiwanese parts exported to the United States, Taiwan, China’s electronic industry chain length would be 1+0.3=1.3 (1 for Taiwan, China, and 0.3 for Japan). Thus, the United States’ electronic industry chain length would be 1+0.4(1.3)=1.52.

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The minimum value of the index is 1 when no intermediate inputs are used to produce final goods or services.

A greater length of the GVC means more opportunities for tapping value added for a country like Brazil. Longer chains suggest the GVC sector is more complex, with more stages done in the nation and possibly more opportunities for upgrading. Similarly, an increase in the length of the GVC over time also suggests that this value chain has become more complex. Figure 7 presents the length of the chain across countries in our selected GVC sectors.

For all sectors Brazil has a relatively larger domestic length of the supply chain while internationally it participates in rather short supply chains. Even though automotive, metals and chemicals show stronger foreign value added embodied in Brazil’s gross exports than agribusiness, compared to its peer countries Brazil does not participate in these chains with many international stages. On the other hand, Brazil shows a greater length of the domestic value chain in automotive and agribusiness. These sectors have a higher total average number of production stages domestically, indicating that the GVCs in these sectors are relatively more complex. In all cases, Canada shows a similar length of the value chains compared to Brazil, but a greater share in its international participation as a buyer than Brazil.

Figure 7: Average length of the value chain, by sector and country (2009)* <!-- Start of picture text --> Agribusiness Metals<br>BRA ARG ZAF TUR THA IDN CAN MEX BRA ZAF ARG IDN TUR MEX CAN THA<br>Domestic (NPS) International (NPS) Domestic (NPS) International (NPS)<br>Automotive Chemicals<br>BRA ZAF IDN TUR ARG CAN MEX THA BRA ZAF MEX TUR ARG CAN IDN THA<br>Domestic (NPS) International (NPS) Domestic (NPS) International (NPS)<br>2.5 2.5<br>2 2<br>1.5 1.5<br>1 1<br>.5 .5<br>0 0<br>3 2.5<br>2<br>2<br>1.5<br>1<br>1<br>.5<br>0 0<br><!-- End of picture text --> Source: Authors’ calculations using OECD/WTO TiVA. Note: * No updates for 2011.

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When looking at the position of Brazil in the value chains in which it participates, Brazil shows that in most sectors and compared to its peer countries, it takes a very central position, apart from automotive in which it shows very low upstreamness. A proxy that one uses to analyze Brazil’s position in the value chain is called upstreamness and downstreamness (Antras, et al. 2012). Both indicators measure the so‐called distance of Brazil to final demand. The more upstream, the further away a country is from final demand. The more downstream, the closer a country is toward final demand. In other words, Brazil (and its peer countries) can produce and hence export in the value chain relatively far away from the final consumer (upstream) or in the center of the value chain, or at the very end of the value chain (downstream). Brazil’s position relative to the four sectors regarding downstreamness is overall fairly average, apart from agriculture (Appendix Figure A3). When looking at the upstreamness side of Brazil, it shows higher levels compared to its peer countries in agribusiness (Appendix Figure A4).

Combining both measures on what Brazil buys and sells in the GVC, it shows average participation rates in agribusiness and metals, and somewhat in the chemical sector, but participates at a relatively low level in the automotive sector. The participation level reflects the trade openness in the GVCs for Brazil and other countries. Overall, for emerging countries such as Brazil the overall participation index lies between 40‐50 percent. In fact, for Brazil this level is 36.2 percent in 2009 (figures for 2011 not available), for Turkey and Mexico this was 37.7 and 41.7 percent respectively. The metals and chemicals sectors show that indeed Brazil’s GVC participation is largely in line with this average, as shown in Figure 8. Moreover, the charts in Figure 8 also show that Brazil in these sectors is relatively stronger on the seller (forward) side than on the buyer (backward) side. This is not the case for Brazil’s automotive sector in which its GVC participation is low compared to its peer countries. The agribusiness sector in Brazil shows both strong forward and backward linkages while having a reasonable level of participation overall compared to some of its comparators such as Mexico and Turkey. Canada is also placed this figure and shows forward participation in agribusiness and somewhat in metals, but in automotive and chemicals it shares a greater backward participation.

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Figure 8: Participation by sector and country (Backward and Forward) (2009)* <!-- Start of picture text --> Agribusiness Metals<br>BRA ARG THA IDN CAN MEX TUR ZAF BRA TUR ZAF CAN MEX THA IDN ARG<br>Backward (PART) Forward (PART) Backward (PART) Forward (PART)<br>Automotive Chemicals<br>BRA MEX CAN TUR ARG ZAF THA IDN BRA THA TUR CAN IDN ZAF ARG MEX<br>Backward (PART) Forward (PART) Backward (PART) Forward (PART)<br>8<br>4<br>6<br>3<br>4<br>2<br>1 2<br>0 0<br>8 8<br>6 6<br>4 4<br>2 2<br>0 0<br><!-- End of picture text --> Source: Authors’ calculations using OECD/WTO TiVA. Note: * No updates for 2011.

In all four sectors, Brazil has increased its share on the buying side from China substantially, which is also the case on the selling side for all sectors, except for automotives. The data allow us to distinguish for Brazil the value‐added on both the buying (i.e. importing) and selling (i.e. exporting) sides by country. The results are shown in Figure 9, which plots for Brazil’s most important trading partners the value‐added sold and bought in terms of its overall total gross exports. Figure 9 lays out both the buying and selling sides for Brazil’s value‐added embodied in gross exports for 1995 and 2011. The shares in negative on the left‐hand side of each panel (in blue) represent the buying shares as imports while the number of shares in positive on the right‐ hand side of both panels (in yellow) shows the selling share as exports.

It shows that for agribusiness, Brazil has also increased on the buying side value‐added imports from the US in addition to China, but slightly decreased value‐added on the selling side. In metals, Brazil has increased its share on the buying side from China and the rest of the world while it has increased the share on the selling side to China and Germany. In automotives, it has increased the buying side from Japan and Italy, in addition to China while substantially decreased it from the US. On the selling side in automotives, it has increased value‐added shares to Mexico and Argentina. Finally, in chemicals, in addition to China, Brazil has increased buying value‐added shares from the rest of the world and the US. On the seller’s side of the chemical sector Brazil has increased shares to the US, China and Argentina.

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Figure 9: Buyer and Seller side of Value‐added embodied in exports (1995‐2011) <!-- Start of picture text --> Agribusiness 1995 Agribusiness 2011<br>ARG ARG<br>AUS AUS<br>BEL BEL<br>CAN CAN<br>CHE CHE<br>ROWSWEMEXNORGBRKORMYSCHNDEUDNKRUSSGPSAUESPFRANLDCHLPRTJPNFINITA ROWMEXNORGBRCHNKORMYSDEUDNKRUSSGPSAUCOLESPFRACHLNLDPRTJPNIDNINDITA<br>THA SWE<br>TWN THA<br>USA TWN<br>ZAF USA<br>-2 -1.5 -1 -.5 0 .5 1 -2 -1.5 -1 -.5 0 .5 1<br>Buying Selling Buying Selling<br>Metals 1995 Metals 2011<br>ARG ARG<br>AUS AUS<br>BEL BEL<br>CAN CAN<br>CHE CHE<br>ROWSWEMEXNORGBRKORMYSCHNDEURUSSGPSAUESPFRANLDCHLPOLPHLJPNIDNITA ROWSWEMEXNORGBRCHNKORMYSDEURUSSGPSAUCOLESPFRACHLNLDPRTJPNINDFINITA<br>THA THA<br>TWN TUR<br>USA TWN<br>ZAF USA<br>-3 -2 -1 0 1 2 3 4 -5 -4 -3 -2 -1 0 1 2 3 4<br>Buying Selling Buying Selling<br>Automotive 1995 Automotive 2011<br>ARG ARG<br>AUS AUS<br>AUT AUT<br>BEL BEL<br>CAN CAN<br>ROWSWEMEXGBRHKGKORMYSCHNDEUDNKRUSSGPCHESAUESPFRANLDCHLJPNIDNITA ROWSWEMEXNORGBRCHNKORMYSDEUCHERUSSGPSAUCOLESPFRACHLNLDTHAJPNINDITA<br>THA TUR<br>TWN TWN<br>USA USA<br>ZAF ZAF<br>-3 -2.5 -2 -1.5 -1 -.5 0 .5 1 -4 -3 -2 -1 0 1 2<br>Buying Selling Buying Selling<br>Chemicals 1995 Chemicals 2011<br>ARG ARG<br>AUS AUS<br>BEL BEL<br>CAN CAN<br>CHE CHE<br>ROWSWEMEXGBRKORMYSCHNRUSSGPDEUDNKSAUCOLESPFRANLDCHLPRTJPNIDNITA ROWMEXNORGBRCHNKORMYSDEURUSSGPSAUCOLESPFRACHLNLDPOLPRTJPNIDNINDITA<br>THA SWE<br>TWN THA<br>USA TWN<br>ZAF USA<br>-3 -2 -1 0 1 2 3 -4 -3 -2 -1 0 1 2<br>Buying Selling Buying Selling<br><!-- End of picture text --> Source: Authors’ calculations; TiVA database.

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<!-- Start of picture text --> So<br>3<br>So<br>&<br>gs<br>2&3<br>58<br>£&<br>£<br>38<br>3s<br>==<br>=<br>B<br>28<br>8<br>° EE IEF ELFEEEESEEESEEEESEEESay oO “ 7 ESS] »<br>HE xpos ©EEE imports<br><!-- End of picture text -->
<!-- Start of picture text --> 8 8<br>2s 2®<br>8 8<br>3£<br>no] nol<br>22<br>fe)>oO&23; fe)68>os:<br>2 _<br>Be Bs<br>re) x)<br>2 2<br>7)oO= Oo=oS<br>ooNN<br>o SEEEPESEEESESESEESESESSS SS o SEEESESESESEEEEESESSSSSSS<br><!-- End of picture text --> MR cactssicrociic © I cxrope 49 EE vercosun
countries in the world. Trade with Brazil is indicated as a cross (+). A country is said to be under (over) trading with Brazil is the predicted value is more (less) than the actual value of trade, which can be seen as an observation to the right (left) of the 45‐degree line. We present results for Brazil as both an importer (in black) and an exporter (in blue) of parts and components.

Brazil is more likely to under‐trade as an importer than as an exporter of parts and components, given its current bilateral trade agreements. Looking at the scatter in Figure 12, we observe that many of Brazil’s trade relationships are centered around the 45‐degree line. This suggests that Brazil is trading close to or at expected levels (as predicted by the gravity model) given its current bilateral trade agreements. Yet there is a cluster of countries in black positioned significantly to the right of the 45‐degree line. These results suggest ample scope to increase imports from these countries in parts and components. Doing so would thus integrate Brazil further into GVCs on the buying side. However, these countries tend to be small. The top ten countries for which Brazil is under‐importing in parts and components include: Libya, Guinea, Angola, Rwanda, Eritrea, Sierra Leone, Kiribati, Moldova, Kyrgyz Republic and Burundi.

Nevertheless, there exist other countries for which Brazil significantly under trades in parts and components as an exporter. There are a few countries in blue positioned significantly to the right of the 45‐degree line. Brazil under trades (both imports and exports) with other natural partners such as Uruguay and Argentina, and with potential partners from the Pacific Alliance such as Mexico and Chile. It also under trades with big markets such as the United States, some European countries (France, Spain) and Canada. These results suggest ample scope to increase exports to these countries in parts and components. Doing so would thus integrate Brazil further into GVCs on the selling side.

Increasing the number and depth of preferential trade agreements may also be an avenue to increase exports of parts and components. There is also a significant relationship between the depth of preferential trade agreements between countries and the level of trade. This is taken up in more detail in the discussion below.

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<!-- Start of picture text --> Parts and components* (2014)<br>&<br>= ent pS -<br>86 ot agen”<br>—2 eeng t heat<br>g tos Eee<br>£=So i#+aele :Se aete ett oyi ~-<br>oS ange tee - +<br>~¢ $ + +<br>2<br>-10 0 10 20<br>Predicted imports (log)<br>All countries + Brazil (as importer)<br>« Brazil (as exporter) ———— 465 degree line<br>(*) BEC 1114+1214+21+22+42+53,<br><!-- End of picture text -->
<!-- Start of picture text --> SYP® AN PG?OD & PP© OD MYAV 1?© WO PDNS BDok B_A PPPOD & © DM MPDV Do PODANS rh<br>POPP DP PD DD DM MPP PPT HP PG LH L' LH<br><!-- End of picture text --> <!-- Start of picture text --> oe sie ee<br>(CarlepraphyGroup.Tha Sounderies,Unitof Ukesane,Wrid Bunt x A4 ~~ © eee££ =Z _-F eid - : ee »c =Sat - =<br>al iB * Bee a — NK 4<br>; [P~— Oe ee es ><br>a, 5 i. be in3 y a, Sine msrN "R Nee aems oiW .<br><!-- End of picture text --> <!-- Start of picture text --> ; _ me 3044 a ; \ ‘J g a pot AS<br>HEE 2030 ; ; Wey ;<br>10,20 . if =<br><!-- End of picture text -->
With preferential tariffs approaching the zero lower bound, the coverage of PTAs in terms of policy areas has widened over time. Analysis based on the new World Bank data set on PTAs content (see Box 2) shows that agreements signed before 1991 included on average 9 provisions whereas agreements signed between 2005 and 2015 included on average 15 provisions (see Figure 15.a). With respect to the provisions included in active agreements, as expected, all agreements include reductions in tariffs on manufacturing goods. At the same time, more than 50 percent of agreements include deeper provisions such as anti‐dumping and countervailing (CVM) measures, rules on competition, movement of capital and intellectual property rights (TRIPS and IPR). Moreover, TBT, investment disciplines and SPS measures are often included in PTAs (see Figure 15.b).

Figure 15: Evolution of depth over time and most common provisions, 1958‐2015

- a. Evolution of depth over time                                                     b. number of agreements per provision

<!-- Start of picture text --> 30 300<br>25<br>250<br>20<br>200<br>15<br>150<br>10<br>5 100<br>0<br>50<br>0<br>Average number of provisions<br>Average number of legally enforceable provisions<br>Source: Calculations based on World Bank PTA content dataset (2016).<br>Number of agreements<br><!-- End of picture text --> Deep PTAs: The Brazilian experience Brazil is a member of only 1 active Preferential Trade Agreement: The Southern Common Market (Mercosur). Mercosur comprises five‐member countries: Argentina, Brazil, Paraguay, Uruguay, and the República Bolivariana de Venezuela.<sup>7</sup> Bolivia is currently in the final stages of the accession to become the sixth member. The group encompasses 290 million people and has a combined GDP of nearly $3.5 trillion. Brazil is also a member of 5 partial scope agreements (PSA)<sup>8</sup> : Global System of Trade Preferences among Developing Countries (GSTP), Latin American Integration Association (LAIA),<sup>9</sup> Protocol on Trade Negotiations (PTN) and MERCOSUR‐India and Mercosur‐SACU.

> 7 Associate members include Chile, Colombia, Ecuador, Guyana, Peru, and Suriname.

> 8A "Partial Scope" Agreement (PS).  "Partial Scope" which is not defined or referred to in the WTO Agreement, means that the agreement covers only certain products.  Partial scope agreements are notified under paragraph 4(a) of the Enabling Clause (source: https://rtais.wto.org/UserGuide/RTAIS_USER_GUIDE_EN.html).

> 9 Brazil has also signed a series of bilateral Economic Complementation Agreements (ACEs) with other Latin American countries such as Colombia, Peru and Chile.  These agreements fall within the legal framework of the Latin American Integration Association (LAIA) and point to a greater opening compared to partial scope agreements.

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<!-- Start of picture text --> Number of agreements<br>oN<br>1<br>©)<br>wo<br>°<br>. ~ a » eCx 5 oO ee« ey er<br>FE EPFL SE FES 8<br>S sf fe ws<br>FTAMEM FTASEIA ME=, cuCU EIA<br><!-- End of picture text --> <!-- Start of picture text --> Number of agreements<br>&<br>wo<br>e<br>=<br>wo<br>Ae & 2 F<br>e ‘ es Pus<br>$<br>MEMM, FTAFTA&EIA ME«=, cuCU&EIA<br><!-- End of picture text -->
<!-- Start of picture text --> Number of agreements<br>=}N<br>wo<br>=<br>=<br>wo<br>° &x» Sse Xss- esGiS: se<br>S<br>ME with EU EEE with Japan<br>EEE North-South MEE South-South<br><!-- End of picture text --> <!-- Start of picture text --> Number of agreements<br>&<br>©<br>2<br>wo<br>oSsoSSCe £— § FS€se© Ff SFS ceCF&rESB OCySX rsHS C7oH<br>HE with EU EEE with Japan<br>GEE with USA MEE North-South<br>MEE South-South<br><!-- End of picture text -->
The legal enforceability of the PTA obligations is established according to the language used in the text of the agreements. In other words, it is assumed that commitments expressed with a 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 <u>policy areas that are covered but that might not be legally enforceable.</u> <!-- Start of picture text --> Figure 18: PTA depth, selected economies (2015)<br>a. Latin America b. BRICS Countries<br>35 1 1 2 1 1 1 2 22 8 10 13 35 1 4 8 11 18<br>30 30<br>25 25<br>20 20<br>15 15<br>10 10<br>5 5<br>0 ‐<br>max depth avg. Depth # of agreements max depth avg. Depth # of agreements<br>Source: Calculations based on World Bank PTA content dataset (2016).<br><!-- End of picture text --> Compared to other agreements, Mercosur does not include disciplines such as investment, competition policy, export taxes, customs and movement of capital. Appendix Tables A3 and A4 illustrate policy areas where Mercosur “performs” better than (green), worse than (red) or as well as (yellow) other agreements in terms of coverage of provisions. Compared to other agreements signed by countries in the Latin America region, Brazil does relatively better in terms of coverage of disciplines such as TBT, SPS and anti‐dumping. However, provisions such as customs, export taxes, public procurement, TRIPs and countervailing measures (CVM), that are currently not in force in Mercosur, are legally enforceable in at least 74 percent of agreements signed by Latin American countries. In the same way, WTO‐X disciplines such as competition policy, investment, movement of capital and intellectual property rights (IPR) are legally enforceable in at least 62 percent of Latin American agreements, but they are either not included or not in force in Mercosur (see Table 2 and Appendix Table A3). Similarly, most of the agreements signed by BRICS include legally enforceable provisions on customs, export taxes, CVM, state aid, competition policy, investment, movement of capital and IPR which are not included in Mercosur. However, Mercosur covers disciplines such as regulations on TBT and SPS and GATS, which are not very common among other agreements signed by BRICS (See Appendix Table A4).

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Table 2: Selected provisions in Mercosur and share of selected economies including each provision

||Latin America<br>42 agreements|BRICS<br>39 agreements|
|---|---|---|
|Provision|LegallyEnforceable|LegallyEnforceable|
|Tariff on manufacturing goods|100%|95%|
|Tariff on agricultural goods|100%|95%|
|Customs|95%|85%|
|Export taxes|88%|64%|
|TBT|88%|49%|
|SPS|88%|49%|
|Anti‐dumping|71%|62%|
|GATS|88%|44%|
|Countervailing measures|74%|54%|
|State Aid|67%|51%|
|Competition policy|74%|41%|
|TRIPs|74%|33%|
|Investment|71%|26%|
|Movement of capital|67%|28%|
|Public procurement|76%|15%|
|STE|62%|21%|
|TRIMs|55%|26%|
|IPR|55%|26%|
|Visa and asylum|45%|23%|
|Environmental laws|24%|13%|
|Labor market regulation|19%|13%|

Note: Bold provisions are Legally Enforceable in Mercosur Deep integration and GVC related trade The expansion of Global Value Chains is related with the proliferation of deep agreements going beyond traditional market access issues. The key insight of the literature is that the depth of trade agreements is associated with the international fragmentation of production. An increase in trade flows involving the exchange of customized inputs, incomplete contracts and costs associated with the search for suitable foreign input suppliers creates new forms of cross‐border policy effects compared to a situation where goods are produced in a single location. Therefore, in order for cross‐border production to operate efficiently, national policies including disciplines such as competition policy, investment, infrastructure and institutions should be harmonized across countries.<sup>13</sup> Linking deep agreements and GVC‐related trade<sup>14</sup> The relationship between deep agreements and GVC‐related trade is formally estimated using a structural gravity equation. An augmented gravity equation is estimated for 189 countries,<sup>15</sup> using data from 1990 to 2014, to investigate the relationship between the depth of an agreement

> 13 Antras and Staiger (2012), Lawrence (1996).

> 14 This section is based on Osnago, Rocha and Ruta (2017), forthcoming

> 15 See appendix table A2 for the list of countries that are included in the regression.

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and GVC‐related trade (see Box 3). The depth of an agreement is captured by the number of legally enforceable provisions that it includes. This methodology has been extensively used by economists to test empirically the determinants of trade flows, and to estimate the effect of preferential trade opening on trade flows.

Box 3: Methodology for the Estimation of the Impact of Deep Integration on GVC Integration Gravity equations are derived from models that seek to explain or predict the relationship between a (dependent) variable (in this case bilateral GVC‐related trade) and a set of other (independent or explanatory) variables whose values can be estimated (in this case elements of deep integration). Endogeneity occurs when both the variable being explained (the left‐hand side variable in the equation) and the explanatory variable (the right‐hand side variable in the equation) may be determined by a third factor not in the model. For example, firms that want to invest in a country may also lobby for free trade agreements. Consequently, a free trade agreement may not increase FDI, but both FDI and FTAs may both come about due to perceived economic benefits of firms and their political lobbying efforts.

In order to control for endogeneity and for the existence of zero trade flows the following structural gravity regression is estimated for a set of 189 countries between include 1990 and 2014 using Poisson pseudo maximum‐likelihood (PPML)<sup>16</sup> : GVC��� �exp�β�Depth��� �δ�� �δ�� �δ����ε��� (1) Where GVCijt is a measure of GVC‐related trade between country i and j at time t and it is captured with gross trade flows in parts and components from the UN Broad Economic Categories classification (BEC)<sup>17</sup> Depth��� is a measure of the depth PTAs. A statistically significant and positive coefficient β1 implies that signing a deeper agreement is associated with greater GVC‐related trade. This variable is calculated as the number of enforceable provisions that are included in a certain agreement. The δs are a series of fixed effects: i for importer, j for exporter and t is year. Finally, εijt is the error term.

Empirical evidence suggests that trade policy aiming at making international production smooth and without disruptions is very important for GVC integration.<sup>18</sup> Figure 19 illustrates that the value of GVC‐related trade in 2014, proxied with trade in parts and components,<sup>19</sup> is on average higher for country pairs that signed deeper agreements. Preliminary results also suggest that higher levels of depth, defined as the number (or share) of legally enforceable provisions included in an agreement, are associated with higher levels of GVC‐related trade.

> 16 See Piermatini and Yotov (2016).

> 17 Parts and components include non‐fuel BEC intermediates (111,121,21,22,42 and 53).

> 18 See also Orefice and Rocha (2012).

> 19 We follow Yeats (1998) and Hummels et al. (2001) and use trade in parts and components to proxy for global production sharing.

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<!-- Start of picture text --> 2<br>cr.)<br>2<br>Bo<br>c<br>7)<br>fe<br>fe)<br>a<br>E<br>°<br>oo<br>Tv<br>=<br>co)<br>4<br>a<br>et,<br>te)<br>£<br>°<br>a<br>£<br>on<br>=<br>°<br>no PTA Low depth Medium depth High depth<br><!-- End of picture text -->
include labor market regulation, consumer protection, cultural cooperation, research and technology and agriculture.

Improvements in the level of depth of Mercosur will further increase Brazil’s GVC‐related trade with Mercosur partners. Rough calculations based on the gravity estimations suggest that if Mercosur had all 17 legally enforceable provisions currently in force, Brazil’s exports in parts and components to other Mercosur members would increase 22 percent on average<sup>20</sup> (2,287 $USD million), while imports in intermediates form other Mercosur members would increase around 37 percent more (2,660 $USD million). In particular, exports to Argentina would increase on average 1,800 $USD million, while imports would increase around 1,916 $USD million. In the same way, exports to Paraguay would increase about 343 $USD million, as imports would increase on average 304 $USD million (see column a of Table 3). These results represent a lower bound and imply the entering into force of disciplines that are already covered. Re‐negotiation of a deeper Mercosur could increase GVC related trade up to 30 $USD billion, where exports to Mercosur members would growth on average 55 percent (5,654 $USD million) whereas imports from other Mercosur members would almost duplicate to 14,332 $USD million (see columns b and c of Table 3).

Table 3: Change in Brazil's GVC‐related trade within Mercosur under different scenarios

|Depth|(a)<br>"Mercosur 17"<br>scenario<br>17|(b)<br>"Deepest within PA"<br>scenario<br>19|(c)<br>"Deepest outside PA"<br>scenario<br>30|
|---|---|---|---|
|(USD'MM)orts||||
|GVC‐related Exports|22.2%|26.7%|54.9%|
|Argentina|$1,802|$2,171|$4,456|
|Paraguay|$343|$413|$848|
|Uruguay|$142|$171|$350|
|Total Exports|$2,287|$2,755|$5,654|
|GVC‐related Imports|36.7%|44.7%|97.9%|
|Argentina|$1,916|$2,333|$5,106|
|Paraguay|$304|$370|$811|
|Uruguay|$440|$536|$1,172|
|Total Imports|$2,660|$3,239|$7,089|

_Notes:_ Depth increases from 6 to 17 in the “Mercosur 17” scenario, to 20 in the “Deepest within PA” scenario and to 30 in the “Deepest outside PA” scenario.

Deeper regional integration between Mercosur and Pacific Alliance could also have a significant impact on Brazil’s GVC‐related trade. As shown in section 2, Brazil is currently under‐trading in trade in parts and components with countries of the Pacific Alliance such as Mexico and Chile. In particular, trade in intermediates is not very high between Brazil and countries of the Pacific

> 20 We use the following formula to calculate the percentage change in GVC related trade ������.�����.���� ~~∗~~<sup>��</sup> <u>��</u> ~~�~~ �1 � ������.�����.���� ~~∗~~ ��<sup>�</sup> ~~�~~

0.222 .

28
Alliance: less than 5 and 10 percent of exports and imports, respectively. In a world of GVCs, where countries can specialize in very specific tasks and can trade between them similar products, Brazil could benefit from trading more with other countries of the region such as Colombia, Mexico or Peru. Specifically, deeper integration between the two blocs would improve trade, FDI flows, competitiveness and development indicators among country members (Barcena, 2014). Table 4 illustrates the impact of a potential agreement between Pacific Alliance and Mercosur on Brazil’s GVC‐related imports and exports for the set of depth scenarios presented above. Results based on the gravity estimation suggest that Brazil’s GVC‐related exports in parts and components to the Pacific Alliance would increase between 36 and 72 percent (US$2,339 million to US$4,685 million) whereas imports in parts and components would increase around 62 and 134 percent (US$3,823 million to US$8,283 million).

Table 4: Change in Brazil's GVC‐related trade within Mercosur under different scenarios

|Depth|(a)<br>"Mercosur 17"<br>scenario<br>17|(b)<br>"Deepest within PA"<br>scenario<br>19|(c)<br>"Deepest outside PA"<br>scenario<br>30|
|---|---|---|---|
|(USD'MM)orts||||
|GVC‐related Exports|36.3%|41.4%|72.8%|
|Mexico|$986|$1,123|$1,975|
|Colombia|$532|$606|$1,066|
|Chile|$499|$569|$1,000|
|Peru|$321|$366|$644|
|Total Exports|$2,339|$2,664|$4,685|
|GVC‐related Imports|62.1%|71.6%|134.7%|
|Mexico|$1,518|$1,750|$3,290|
|Colombia|$456|$525|$987|
|Chile|$1,849|$2,131|$4,006|
|Peru|$638|$735|$1,382|
|Total Imports|$3,823|$4,406|$8,283|

_Notes:_ Depth increases from 6 to 17 in the “Mercosur 17” scenario, to 20 in the “Deepest within PA” scenario and to 30 in the “Deepest outside PA” scenario.

If Mercosur and Pacific Alliance sign an agreement as deep as the deepest agreement within Pacific’s members (Colombia ‐ Mexico with 19 provisions), Brazil’s trade with Mexico would increase on average 2,800 $USD million, generating additional 1,123 $USD million exports and 2,800 $USD million imports in intermediates. In the same way, exports in parts and components to Colombia would increase about 606 $USD million, while imports in parts and components would increase on average 525 $USD million. Under this scenario, the agreement should include all WTO+ provisions as well as competition policy, movement of capital and IPR, investment and visa and asylum.

Brazil’s integration agenda both with current PTA members and through new agreements should take into consideration not only disciplines that fall under the mandate of the WTO but also WTO‐ X provisions such as investment and competition policy and IPR. What gives multinational 29
enterprises their competitive edge in international markets is their firm‐specific assets – human capital (management or technical experts).<sup>21</sup> Hence, investment and IPR provisions in PTAs that give ample protection to these assets will encourage more production sharing. In addition, the adoption of competition policy is in many ways a natural complement to the reduction of trade and investment barriers, as the presence of monopolies, cartels and other forms of private anti‐ competitive practices can frustrate the benefits of trade, investment and services reform. These market features prevent multinational enterprises from taking full advantage of differences in costs among countries through fragmenting production. Additional disciplines such as visa and asylum, labor market regulation or consumer protection should be also considered in new negotiations given the additional benefits that they bring in terms of GVC integration.

# 4. Conclusion

This paper assesses Brazil’s current participation in global value chains and explores the role of deep agreements as a vehicle for further integration into global value chains. Three mains results arise from the analysis.

First, Brazil exhibits lower international engagement in global value chains. Brazil has witnessed high growth in total domestic value added embodied in gross exports since 1995, yet it exhibits lower international engagement in global value chains, but tends to be stronger as a seller than a buyer. Most of the participation on the selling side comes from indirect linkages with domestic input sectors, and services sectors have been important for growing the indirect value added in global value chain–oriented exports.

Second, Brazil has not leveraged integration through preferential trade agreements as a channel to participate into global value chains. Brazil is less integrated, in terms of number of agreements signed and number of disciplines included, compared to other countries of the region or compared to BRICS. Brazil is a member of only 1 active Preferential Trade Agreement: Mercosur. With respect to content, only 6 out of the 17 disciplines that are covered and legally enforceable in the Mercosur agreement are currently in force. In addition, Mercosur does not include disciplines which are key to boost GVC‐related trade such as investment, competition policy, export taxes, customs and movement of capital.

Third, deepening existent agreements and signing new (and deeper) agreements could further increase Brazil’s participation in GVCs. A deep integration agenda focusing not only on border measures, but also on beyond‐the‐border measures, would help Brazil to maximize the benefits from participation in global value chains. Other than its natural partners, Brazil should integrate with countries and regions such as the European Union, the Pacific Alliance and Asia in order to fully benefit from regional and glozla integration in GVCs.

> 21 See Helpman (1984); Markusen (1984); Brainard (1993); Brainard (1997) and Markusen (1998).

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