A new mechanism for trade agreements to revitalize the Global Value Chains

NO : WP-2024-001

AUTHOR : Himanshu Jaiswal & A. Ganesh-Kumar

TITLE :  A new mechanism for trade agreements to revitalize the Global Value Chains


The import tariff system has made a harmful dent on the global trading system. To avoid this, many countries have chosen the second-best option- ‘an FTA’; because the first-best where there is no tariff at all in the global trading system is close to impossible to achieve. FTAs due to their structural factors like, stringent Rules of Origin and other non-tariff measures have not been very successful. Also, they have been labelled as discriminatory to non-partner countries. Despite having a potential of estab-lishing and strengthening the Global value chains, FTAs have done a dismal work in dimension too. To overcome this limitation, we propose in this article a new mechanism called ‘Sectoral Trade Agreement (STA)’ which is an FTA among all major producing countries in a particular sector or industry. An STA in automobile sector will be compared with the traditional bilateral FTA with different utilization rate. In our CGE based study, Welfare as a total rises in STA in comparison to FTA scenarios and this is increasing for some non-participating blocks also. It is also shown here how a composite scenario where both FTA and STA are functioning is a better option for trade liberalization and how this is a new ’second-best’.

Keywords: Free Trade Agreement, Rules of Origin, Global Value Chain, Preference Uti¬lization Rate, CGE Analysis
JEL Code: F13, F15, F17, F47

Weblink: http://www.igidr.ac.in/pdf/publication/WP-2024-001.pdf