Coverage and enforceability of investment rules in PTAs: the role of global value chain trade and regulatory differences

FIW (Working Paper Series 142)

Against the background of a changing landscape of trade and investment governance in the 21st century, characterised by the proliferation of deep preferential trade agreements (PTAs), this paper econometrically tests the importance of global value chain trade and regulatory differences in explaining the likelihood of a country pair to include an (enforceable) investment provision in the PTA. The spatial probit analysis, based on Bayesian Monte Carlo Markov Chain simulation, reveals that higher production network trade and strongly differing legal frameworks are indeed associated with a higher likelihood of including (enforceable) investment provisions. This is true even when controlling for interdependence between countries and conducting a variety of sensitivity checks, underscoring the importance of deep integration in the context of global value chains. However, when excluding EU countries from the sample, investment coverage and enforceability is rather driven by positive spatial interdependence between countries, raising the question whether the focus on global value chain trade and regulatory differences is something characteristic of EU trade policy making.