Analysis of the Economic Impact of Investment Provisions in Regional Trade Agreements

Abstract

As countries turn more to regionalism as a means of forwarding co-operation on trade rules and other areas of policymaking, rules on investment are increasingly being incorporated into regional trade agreements (RTAs). We analyse the economic consequences of including investment provisions in trade agreements by creating an index of the extensiveness of investment provisions in RTAs and then using that index in a gravity model framework of trade and investment. The results indicate that investment provisions are positively associated with trade and, to an even greater extent, investment flows. Further, we observe an insignificant effect of bilateral investment treaties on investment flows, suggesting either that substantive investment provisions in RTAs impact trade and FDI flows more profoundly, or that the combination of substantive investment rules and provisions liberalising other parts of the economy jointly impact trade and investment more significantly. The report also includes case studies that confirm that the relationship between investment and other provisions in trade agreements is complex and depends on many factors.

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