Global Value Chains, Firm Preferences and the Design of Preferential Trade Agreements
| DOI | http://doi.org/10.1111/1758-5899.12612 |
| Date | 01 October 2018 |
| Published date | 01 October 2018 |
Global Value Chains, Firm Preferences and the
Design of Preferential Trade Agreements
Jappe Eckhardt
University of York, UK
Kelley Lee
Simon Fraser University, Canada
Abstract
The conventional view in the literature is that only the largest and most productive firms in a country benefit, and hence sup-
port the signing of preferential trade agreements (PTAs), as they are able to take advantage of the key benefits such agree-
ments offer. In this paper we argue that such firms may indeed be generally supportive of PTAs, but that their preferences
often differ when it comes to the exact design of PTAs. These different preferences stem from the ways that firms have orga-
nized their value chains. We focus on one crucial issue where firms may hold different preferences, depending on the organi-
zation of their value chains: Rules of Origin (RoO). We test the plausibility of our argument through a detailed analysis of the
preferences and political strategies of tobacco firms in the context of the North American Free Trade Agreement (NAFTA)
negotiations.
The proliferation of preferential trade agreements (PTAs)
since the late 1980s is often described as one of the most
important changes to the international trading system in
recent decades. Over time, PTAs have gone beyond elimi-
nating tariffs and nontariff barriers for market access, to
increasingly cover so-called ‘behind the border’measures
such as regulations related to production processes, invest-
ment protections and dispute settlement mechanisms.
These developments are often linked to the ‘unbundling of
production’and the formation of regional and global value
chains (GVCs). In order for GVCs to function optimally, the
argument goes, there is need for countries to lower trade
barriers, as well as, harmonize policies, rules, and standards
governing trade and investment. PTAs are seen as a key
means for achieving these goals and, therefore, part of a
supporting institutional framework for deepening value
chains formed by transnational corporations. Research sug-
gests that the signing of PTAs indeed leads to increased
trade within production networks among PTA members.
Given the importance attributed in the literature to GVCs,
firm performance and PTAs, it is surprising how little we still
do not know about the exact link between, on the one
hand, PTA formation and, on the other hand, GVC integra-
tion, firm preferences and their political strategies. There has
been an important, and rapidly growing, literature showing
that the only firms really benefiting from the signing of
PTAs are the largest and most productive. This is because
they are able to take advantage of certain key benefits
offered by such agreements like access to closed or
restricted markets for their exports, and the opportunity to
move (stages of) production across borders. However, with
a few notable exceptions, most of this ‘heterogeneous firm’
literature does not explicitly take the role of GVCs into
consideration.
Building on the existing scholarship, we propose in this
article that GVC integration may affect firm preferences
regarding PTAs and their political strategies to further
these preferences. Although we expect that the largest
and most productive firms in a country will be generally
supportive of PTAs, we argue that they may differ in their
preferences over the exact PTA design (i.e. the inclusion
of certain provisions), depending on the organization of
their value chains at the time of negotiations. We suggest
that one issue where large and productive firms may dif-
fer in particular is Rules of Origin (RoO) - i.e. the criteria
used to determine the national source of a product. That
is, firms producing or sourcing the bulk of their inputs
from within the PTA area are expected to have a strong
preference for stringent RoO, while firms depending on
offshore procurement from outside the PTA area are
expected to be in favor of more lenient RoO to accom-
modate their foreign production or sourcing of inputs. As
such, we contribute towards a more systematic under-
standing of the relationship between GVCs, firm prefer-
ences and the design of (trade) institutions (Eckhardt and
Poletti, 2018).
We test the plausibility of our argument through an in-
depth case study on the preferences and political strategies
of transnational tobacco companies (TTCs) in the context of
the North American Free Trade Agreement (NAFTA) negotia-
tions. We draw, in particular, on internal company docu-
ments available through the Truth Tobacco Industry
©2018 University of Durham and John Wiley & Sons, Ltd. Global Policy (2018) 9:Suppl.2 doi: 10.1111/1758-5899.12612
Global Policy Volume 9 . Supplement 2 . October 2018
58
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