Deep trade agreements, production position distance and bilateral global value chain participation

Abstract Owing to globalisation‐induced fragmentation of production across regions and reorganisation of global value chains (GVCs), more attention is being paid to the impact of deep preferential trade agreements (PTAs) on GVC participation. We examine how the promotional effect of deep trade agreements on GVC participation changes with GVC production position distance between member countries. We argue that production position distance has an inverted U‐shaped effect on the relationship between deep trade agreements and bilateral GVC participation. Specifically, starting with a short production position distance, an increase in production position distance can strengthen the promotional effect of deep trade agreements on bilateral GVC participation. However, when the production position distance reaches a certain threshold, an increase in production position distance weakens the promotional effect of deep trade agreements on bilateral GVC participation. Analysis of panel data, which covers 43 countries over the 2000–2014 period, supports our predictions. Further analysis shows that the inverted U‐shaped effect of production position distance on the relationship between deep trade agreements and bilateral GVC participation is more likely to take place in the manufacturing sector rather than in the services sector.