March 2018 Trade, Investment and Competitiveness Effects of a Deeper Central European Free Trade Agreement Alan Mulabdic Michele Ruta © 2021 International Bank for Reconstruction and Development / The World Bank 1818 H Street NW Washington DC 20433 Telephone: 202-473-1000 Internet: www.worldbank.org This work is a product of the staff of The World Bank with external contributions. The findings, interpretations, and conclusions expressed in this work do not necessarily reflect the views of The World Bank, its Board of Executive Directors, or the governments they represent. The World Bank does not guarantee the accuracy, completeness, or currency of the data included in this work and does not assume responsibility for any errors, omissions, or discrepancies in the information, or liability with respect to the use of or failure to use the information, methods, processes, or conclusions set forth. 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Effects of a Deeper CEFTA† Alen Mulabdic and Michele Ruta Abstract This paper studies the economic effects of “deepening” the Central European Free Trade Agreement (CEFTA). It combines new information on the content of trade agreements with gravity model estimates of the impact of deep trade agreements—agreements that go beyond the elimination of tariffs and other border restrictions. The analysis suggests that CEFTA is a relatively shallow trade agreement as it covers mostly policy areas under the current WTO mandate. The estimated trade impacts of CEFTA on member countries are relatively modest, varying between 0.02 and 7.4 percent. CEFTA’s members would gain from simultaneously deepening their integration reciprocally and vis-à-vis the EU. In particular, a trade agreement with the EU similar to the EU-Norway agreement could increase total exports by CEFTA members between 4 and 27 percent. Keywords: Deep Trade Agreements, CEFTA, Western Balkans JEL Codes: F13, F15, F17 † We are grateful to Paulo Correa and Shawn Tan for helpful comments and suggestions. Errors are our responsibility only.  World Bank, 1818 H Street, Washington DC, USA. Alen Mulabdic, Email: amulabdic@worldbank.org; Michele Ruta, Email: mruta@worldbank.org. 1 1. Introduction Trade agreements boost trade among trading partners. Deep trade agreements – comprehensive agreements that go beyond tariff reductions to cover areas such as competition, investment and standards – boost trade even more. Deep provisions create trade directly, as services commitments that offer higher market access to foreign firms, or indirectly by facilitating foreign investment and making it easier to operate production activities that span multiple borders. A large economic literature shows the positive effect that trade agreements have on trade flows (Limao, 2016). Recent work at the World Bank finds evidence of the additional trade impact of deep agreements (Mattoo, Mulabdic and Ruta, 2022). The Western Balkans countries are currently working towards enhancing regional integration among themselves and with the European Union. In July 2017, the six countries recently adopted a Multi-annual Action Plan for a Regional Economic Area in the Western Balkans (MAP) to promote further trade integration and regional investment and to facilitate labor mobility. The MAP consists of measures that would deepen the Central European Free Trade Agreement (CEFTA) they have among themselves, along with Moldova.1 The countries have committed to deepen the CEFTA by entering into force the additional protocols on trade facilitation (by 2018) and services liberalization (by 2019) and negotiating and adopting an additional protocol on dispute settlement by 2019-2020. This note provides an assessment of the Central European Free Trade Agreement (CEFTA). In particular, it identifies the content of the 2006 agreement, evaluates its impact on member states and calculate the benefits for members of “deepening” CEFTA under different scenarios. 2. The changing landscape of trade agreements The number of trade agreements and their content have changed dramatically since the early 1990s (Figure 1). 2 The number of agreements in force increased slowly in the 1970s and 1980s and then remained constant until the beginning of the 1990s, after which a large number of agreements entered into force. Between 1990 and 2015, the number of trade agreements increased from around 20 to close 1 The full list of measures in the MAP can be obtained from this website: https://www.rcc.int/docs/383/multi- annual-action-plan-for-a-regional-economic-area-in-the-western-balkans-six 2 The data on the “Content of Deep Trade Agreements” are available at: http://data.worldbank.org/data- catalog/deep-trade-agreements. 2 to 300. Along with the number, the content of trade agreements has changed as well. While older agreements focused on few policy areas (“shallower” trade agreements covering less than 10 policy areas dominated up to the late 1990s), an increasing share of recent agreements cover a larger number of policy areas suggesting a deepening of trade agreements. Figure 1: Number of legally enforceable provisions in PTAs notified and in force, December 2015 25 300 Cumulative Number of Agreements Cumulative 250 20 Number of Agreements 200 15 150 10 100 5 50 0 0 1951 1954 1957 1960 1963 1966 1969 1972 1975 1978 1981 1984 1987 1990 1993 1996 1999 2002 2005 2008 2011 2014 Agreements with more than 20 provisions Agreements with between 10 and 20 provisions Agreements with less than 10 provisions Cumulative Source: Mattoo, Mulabdic and Ruta (2022). Table A1 in Appendix A shows that there is an ordering in terms of which provisions are included in trade agreements with different values of depth. Specifically, we divide the agreements into three categories based on the number of legally enforceable provisions (No. Provisions) and calculate the share of agreements that include each policy area. We find that policy areas included in shallower agreements (“Less than 10”), with the exception of a statistics chapter, tend to be at least as frequent in deeper agreements. The majority of these agreements tend to cover tariffs and other border measures such as export taxes and customs. Competition policy is the only policy area outside the mandate of the WTO appearing in a majority of shallower trade agreements. As agreements become deeper (“Between 10- 20”), they increasingly extend their reach to areas such as state aid, anti-dumping and countervailing measures. Finally, deeper agreements (“More than 10”) tend to cover areas related to intellectual property rights, movement of capital, standards in addition to the areas covered by shallower agreements. 3 3. The content of CEFTA CEFTA was established in December 1992 between Czech Republic, Hungary, Poland and Slovakia. Subsequently, the agreement was expanded to include Bulgaria, Croatia, Romania and Slovenia. These countries left CEFTA as they became EU members. In 2006, a new CEFTA agreement was established that currently includes the non-EU Western Balkans countries in addition to Moldova. As of 2017, CEFTA members are Albania, Bosnia and Herzegovina, FYR Macedonia, Moldova, Montenegro, Serbia and Kosovo.3 CEFTA members are currently involved in 24 Preferential Trade Agreements (PTAs) in addition to CEFTA itself (Table 1). The number of covered and legally enforceable areas in these agreements varies between 5, for the Armenia–Moldova Free Trade Agreement (FTA), and 18 for the agreement between Albania and the EU. The main text of the 2006 CEFTA agreement covers 16 policy areas (listed in Table 2), which is a relatively large number given that on average CEFTA countries cover 10 areas in their agreements (CEFTA excluded). As a comparison, the EU and the North American Free Trade Agreement (NAFTA) included 43 and 20 legally enforceable provisions respectively. CEFTA has been very effective in eliminating tariffs for all industrial goods within a short phase-out period and in reducing substantially tariff rates for a large number of agricultural goods.4 3 Due to trade data limitations we are unable to analyze the impact of CEFTA on Kosovo. 4 See Annex 10 to the CEFTA agreement. 4 Table 1: List of trade agreements signed by CEFTA countries, EU, EU-Norway and EFTA Year of entry Depth into force CEFTA 2007 16 EU - Albania 2006 18 EU - Bosnia Herzegovina 2008 9 EU - FYR Macedonia 2001 16 EU -Moldova 2014 15 EU - Montenegro 2008 10 EU - Serbia 2010 11 EFTA - Albania 2010 11 EFTA - Bosnia and Herzegovina 2015 16 EFTA - FYR Macedonia 2002 11 CEFTA Countries PTAs EFTA - Montenegro 2012 12 EFTA - Serbia 2010 12 Turkey - Albania 2008 12 Turkey - Bosnia and Herzegovina 2003 12 Turkey - FYR Macedonia 2000 9 Turkey - Montenegro 2010 12 Turkey - Serbia 2010 10 Ukraine - FYR Macedonia 2001 9 Ukraine - Moldova 2005 8 Ukraine - Montenegro 2013 8 Commonwealth of Independent States (CIS) FTA 2012 8 Russian Federation - Republic of Moldova 1993 6 Russian Federation - Serbia 2006 8 Armenia - Moldova 1995 5 Kyrgyz Republic - Moldova 1996 6 EU 1958 43 EU-Norway 1994 36 European Free Trade Association (EFTA) 1960 20 Note: “depth” is the simple count of legally enforceable provisions included in an agreement. Figure 2 shows that CEFTA is the deepest agreement that its members ever signed (except for Albania). It is a “deep” agreement as it includes provisions dealing with policy areas beyond tariff reforms, but its depth is quite limited compared to other agreements in the region (Table 2). Specifically, when comparing CEFTA to other agreements in the region such as EFTA, EU-Norway or the EU, it emerges that CEFTA has good coverage of areas under the WTO mandate (i.e. traditional trade policy areas such as tariffs, export taxes and trade remedies). However, legal enforceability of CEFTA provisions is an issue. Except for tariffs 5 on agricultural and manufacturing goods, all other policy areas covered by CEFTA have a consensus requirement to reach dispute settlement decisions. In light of this, it could be argued that all these policy areas are not strictly legally enforceable. Figure 2: Maximum and Average Depth by Country 45 40 NUMBER OF PROVISIONS 35 30 25 20 15 10 5 0 Max Depth Avg. Depth CEFTA (16) An important caveat is that the information on the content of CEFTA in the World Bank database refers to the text of the 2006 agreement as submitted to the World Trade Organization. It is likely that currently CEFTA covers more areas due to additional protocols negotiated subsequently that are not captured by the World Bank database.5 For instance, Additional Protocol 5 on trade facilitation was negotiated in 2015 following the structure of the WTO trade facilitation agreement. Similarly, while the original CEFTA agreement does not include a trade in services section, Additional Protocol 6 focuses on services liberalization and is currently being negotiated with an aim to be adopted by 2018. This additional protocol includes the usual articles of the General Agreement on Trade in Services (GATS) of the WTO and additional commitments for each country. 5 The measure of “depth” in this note captures the scope of the agreement in terms of areas covered, rather than in terms of the liberalizing content of commitments or the stringency or the rules against protection. 6 Table 2: Provisions in CEFTA, EU, EU-Norway and EFTA and share of CEFTA member’s PTAs with third countries including each provision Share of CEFTA member’s PTAs CEFTA EU EU-Norway EFTA with 3rd countries including each provision Provision Legally enforceable Share Tariffs on agricultural goods Yes Yes Yes Yes 100 Tariffs on manufacturing goods Yes Yes Yes Yes 100 Export taxes Yes Yes Yes Yes 96 State aid Yes Yes Yes Yes 83 Customs Yes Yes Yes Yes 75 TRIPS Yes Yes Yes Yes 71 WTO Plus STE Yes Yes Yes Yes 67 Anti-dumping Yes Yes Yes Yes 54 Public procurement Yes Yes Yes Yes 50 Countervailing measures Yes Yes Yes Yes 42 TBT Yes Yes Yes Yes 38 SPS Yes Yes Yes Yes 25 GATS Yes Yes Yes Yes 8 TRIMS No Yes No No 0 Competition policy Yes Yes Yes Yes 83 IPR Yes Yes Yes Yes 54 Movement of capital No Yes Yes Yes 38 Agriculture No Yes No No 13 Illegal immigration No Yes Yes No 8 Labor market regulations No Yes No No 8 Statistics No Yes Yes No 8 Social matters No Yes Yes Yes 8 Investment Yes Yes Yes Yes 8 Environmental laws No Yes Yes No 8 Energy No Yes Yes No 4 Approximation of legislation No Yes Yes No 4 Data protection No Yes Yes No 4 Political dialogue No No Yes No 0 Consumer protection No Yes Yes No 0 Human rights No No Yes No 0 Health No No No No 0 Terrorism No Yes No No 0 WTO Extra Economic policy dialogue No Yes No No 0 Taxation No Yes No No 0 Innovation policies No No No No 0 Illicit drugs No No Yes No 0 Money laundering No No No No 0 Nuclear safety No Yes Yes No 0 Public administration No No No No 0 Civil protection No No No No 0 Industrial cooperation No Yes Yes No 0 Cultural cooperation No Yes No No 0 Financial assistance No Yes Yes No 0 Research and technology No Yes Yes No 0 Information society No No Yes No 0 Anticorruption No Yes Yes No 0 Education and training No Yes No Yes 0 Regional cooperation No Yes Yes No 0 Mining No Yes No Yes 0 Visa and asylum No Yes No No 0 SME No Yes No No 0 Audiovisual No Yes Yes No 0 7 4. The trade impact of deepening CEFTA To better understand the trade impact of deepening CEFTA countries’ PTAs, this paper uses estimates from a gravity equation on the effect of depth on trade flows to calculate changes in bilateral trade flows under different scenarios.6 The estimated trade impacts of CEFTA on member countries’ trade are relatively modest – they vary between 0.02 for Moldova and 7.4 percent for Montenegro (Table 3).7 To calculate the implied welfare benefits of CEFTA, we rely on estimates of the elasticity of income to trade obtained by Feyrer (2009). We report here results based on an elasticity of 0.5, which is the lower level of the elasticity capturing the lower bound of the welfare impacts. Based on this elasticity, the calculated welfare impact of CEFTA is between 0 and 3.7 percent. Table 3 shows for all CEFTA members, except for Montenegro, trade agreements with non-CEFTA members (e.g. EU and EFTA countries) increased total trade and welfare more than CEFTA itself. The impacts are particularly large for countries that trade more intensively with the EU: Albania, Macedonia and Moldova. Table 3: Trade and welfare change (current agreements) Total Trade Welfare Scenario Country (% Change) (% Change, Real GDP) (1) (2) (1) (2) CEFTA Albania 1.15 3.29 0.58 1.64 Bosnia and Herzegovina 0.97 2.77 0.48 1.38 Macedonia, FYR 0.89 2.55 0.45 1.28 Moldova 0.02 0.06 0.01 0.03 Montenegro 2.60 7.43 1.30 3.72 Serbia 1.34 3.84 0.67 1.92 Other PTAs Albania 6.23 17.92 3.12 8.96 Bosnia and Herzegovina 3.27 9.10 1.63 4.55 Macedonia, FYR 5.63 16.08 2.82 8.04 Moldova 5.08 14.39 2.54 7.20 Montenegro 2.02 5.65 1.01 2.82 Serbia 3.55 9.95 1.78 4.97 Note: (1) Beta=.19, gravity w/out internal flows; (2) Beta=.52 w/internal flows. Source: Based on Mulabdic, Osnago and Ruta (2017) and Mattoo, Mulabdic and Ruta (2022). 6 See Appendix B for the methodology based on Mulabdic, Osnago and Ruta (2017) and Mattoo, Mulabdic and Ruta (2022). 7 This impact is calculated under the assumption that all the 16 provisions included in CEFTA are legally enforceable while it could be argued that due to the consensus requirement most areas are not strictly legally enforceable. 8 In terms of future arrangements, we consider different scenarios: (i) CEFTA improves the legal enforceability of its provisions (i.e. the number of strictly legally enforceable provisions increases from 2 to 16); (ii) CEFTA countries deepen their commitments among themselves to the level of the European Free Trade Association (EFTA);8 (iii) CEFTA countries deepen their commitments among themselves to the level of the Norway-EU arrangement; (iv) CEFTA countries deepen their commitments among themselves to the level of the EU agreement; (v) CEFTA countries expand and uniform the coverage of their commitments with the EU to the level of the arrangement between the EU and Norway. The first two scenarios are relatively simpler to implement. Scenario (i) would require a switch from a consensus regime to a majority system in terms of dispute settlement mechanisms, while scenario (ii), increasing the depth of CEFTA to the level of EFTA, would require the addition of four provisions: movement of capital, consumer protection, labor market regulation, and environmental laws. The impact of these arrangements is estimated to be large especially if the current number of legally enforceable provisions is equal to 2 (see Table 4). The estimated long-term impact is an increase in trade and welfare by around 2 percent for (i) and 2.5 percent for the case of CEFTA’s depth equal to EFTA.9 The next two scenarios require much more effort and time to be implement. However, the expected welfare gains are large, up to 6.7 percent, especially for countries that trade intensively with other CEFTA members such as Montenegro, Serbia and Albania. This type of arrangements would require the addition of a large number of provisions that mainly cover WTO extra areas which are potentially sensitive and not directly related to trade flows such as labor market regulations, environmental laws, illegal migration, and consumer protection to name a few (see Table 2 and Table A2 in Appendix A for details). Finally, a more ambitious plan of integration with EU could lead to large welfare gains. Reaching the level of EU-Norway integration, which covers 36 policy areas, would require the depth of bilateral agreements between each CEFTA country and EU to increase by a factor of 2 or 3 (see Table 1). Results in Table 4 suggest that countries that currently are involved in shallow agreements and trade intensively with the EU such as Bosnia and Herzegovina (depth equal to 9) and Serbia (depth equal to 11) would benefit disproportionately more. The increase in total trade varies between 4.3 percent for Montenegro to 27 percent for Bosnia and Herzegovina, reflecting both their current level integration with and exposure to 8 The European Free Trade Association (EFTA) member states are Iceland, Liechtenstein, Norway, and Switzerland. 9 The trade and welfare impact in (ii) when assuming initial level of depth of 2 is approximately equal the sum of scenario (i) and (ii). 9 the EU. Welfare of CEFTA members would increase by up to 13 percent, with welfare change in many cases larger than those delivered by all PTAs currently in force. Table 4: Trade and welfare change (future agreements) Total Trade Welfare Scenario Country (% Change) (% Change) (1) (2) (1) (2) (i) CEFTA from 2 to 16 Albania 1 2.84 0.5 1.42 Bosnia and Herzegovina 0.84 2.39 0.42 1.2 Macedonia, FYR 0.78 2.21 0.39 1.1 Moldova 0.02 0.05 0.01 0.03 Montenegro 2.27 6.43 1.13 3.21 Serbia 1.17 3.32 0.59 1.66 (ii) CEFTA depth = EFTA Albania 0.28 0.77 0.14 0.38 Bosnia and Herzegovina 0.24 0.64 0.12 0.32 Macedonia, FYR 0.22 0.59 0.11 0.30 Moldova 0.01 0.01 0.00 0.01 Montenegro 0.63 1.73 0.32 0.87 Serbia 0.33 0.89 0.16 0.45 (iii) CEFTA = Norway-EU Albania 1.45 4.21 0.73 2.10 Bosnia and Herzegovina 1.22 3.54 0.61 1.77 Macedonia, FYR 1.13 3.27 0.56 1.63 Moldova 0.03 0.08 0.01 0.04 Montenegro 3.28 9.52 1.64 4.76 Serbia 1.70 4.92 0.85 2.46 (iv) CEFTA = EU Albania 1.99 5.93 1.00 2.96 Bosnia and Herzegovina 1.67 4.99 0.84 2.49 Macedonia, FYR 1.54 4.60 0.77 2.30 Moldova 0.04 0.11 0.02 0.06 Montenegro 4.50 13.40 2.25 6.70 Serbia 2.32 6.93 1.16 3.46 (v) CEFTA-EU = Norway-EU Albania 6.09 17.53 3.05 8.77 Bosnia and Herzegovina 9.14 27.22 4.57 13.61 Macedonia, FYR 6.95 20.16 3.48 10.08 Moldova 5.99 17.43 2.99 8.72 Montenegro 4.28 12.70 2.14 6.35 Serbia 7.57 22.38 3.78 11.19 Note: (1) Beta=.19, gravity w/out internal flows; (2) Beta=.52 w/internal flows. Source: Based on Mulabdic, Osnago and Ruta (2017) and Mattoo, Mulabdic and Ruta (2022). 10 5. The way forward for CEFTA: Lessons from other trade agreements Deepening CEFTA involves at least three dimensions. A first dimension concerns the legal enforceability of the provisions under the trade agreement. As discussed, the consensus requirement to reach dispute settlement decisions under CEFTA may limit the legal enforceability of current provisions. Working to strengthen this element would increase legal certainty and may provide a boost to regional trade and investment as the analysis in the previous section indicates. A second dimension of deepening CEFTA concerns the scope of a future agreement. While the political economy realities of the region will largely constrain the set of available options for policy makers, the experience of other trade agreements may provide an indication of the way forward. Table 5 shows the policy areas that are most frequently embedded in deeper trade agreements. Based on this evidence, future integration efforts could focus on areas not currently covered by CEFTA but frequently included in deep agreements. These are areas mainly outside the WTO mandate and address the regulation of capital movement, restrictions on foreign direct investment, and labor market and environmental laws. Finally, the third dimension of the depth consists of the liberalizing content of commitments and the stringency of the rules embedded in a trade agreement. This is a difficult question as in trade agreements the devil is often in the details. 11 Table 5: Provisions included in more than 60% of agreements in each group Shallow Deep Very Deep Tariffs on manufacturing goods Tariffs on agricultural goods Export taxes Customs Competition policy State aid Anti-dumping Countervailing measures TRIPS STE TBT GATS SPS Movement of capital Public procurement IPR Investment Environmental laws Labor market regulations TRIMS Note: “shallow” agreements are defined as those that include less than 10 legally enforceable provisions; “deep” agreements include between 10 and 20 legally enforceable provisions; and “very deep” agreements include more than 20 legally enforceable provisions. 6. Concluding remarks As stated by the CEFTA Secretariat, the various parties joined the agreement because of their “ belief in the importance of […] the EU accession agenda in the region.”10 Currently all CEFTA members have a trade agreement in force with EU. Of the 7 CEFTA members 4 are official EU candidates, Bosnia and Herzegovina and Kosovo are potential candidates, and Moldova signed the association agreement with EU that has been in effect since July 2016.11 The Western Balkans countries are also committed to further regional integration set out in the MAP. The current political and economic situation in the EU may slow down the integration process or even put on hold any enlargement plans envisioned in the mid-2000s. However, alternative arrangements such as a Norway / EFTA – EU type of integration could be viable in the current environment. To be successful, CEFTA countries would need to deepen their commitments among themselves and seek greater 10 http://cefta.int/cefta-parties-2/ 11 https://ec.europa.eu/neighbourhood-enlargement/countries/check-current-status_en#pc 12 integration with EU through bilateral or multilateral agreements. Harmonization of rules and reduction in non-tariff barriers among CEFTA countries could stimulate foreign direct investment in the free-trade area as investors would see a market of more than 20m people instead of seven small countries. While deeper commitments with the EU could facilitate flows of goods, services, people, capital, and ideas due to institutional convergence to the EU and lower policy uncertainty. 13 Appendix A: Additional statistics and description of policy areas covered in the Content of Deep Trade Agreements database Table A1: Share of provisions over different levels of depth Between 10 and Less than 10 More than 20 No. Provisions 20 Tariffs on manufacturing goods 97% 100% 100% Tariffs on agricultural goods 96% 100% 100% Export taxes 73% 81% 95% Customs 67% 95% 100% Competition policy 58% 73% 88% State aid 39% 69% 88% Anti-dumping 35% 88% 98% Countervailing measures 22% 77% 98% Statistics 20% 0% 23% TRIPS 18% 75% 98% STE 18% 69% 68% TBT 17% 73% 95% Movement of capital 15% 68% 93% GATS 14% 67% 98% SPS 12% 72% 98% Public procurement 12% 59% 80% IPR 6% 56% 75% Environmental laws 3% 14% 83% Labor market regulations 3% 13% 75% Investment 2% 58% 75% TRIMS 2% 42% 73% Visa and asylum 2% 37% 57% Industrial cooperation 2% 5% 33% Social matters 2% 5% 30% Agriculture 1% 10% 45% Energy 1% 8% 40% Data protection 1% 5% 20% Anticorruption 1% 5% 18% SME 1% 4% 25% Regional cooperation 1% 3% 15% Taxation 1% 2% 30% Approximation of legislation 1% 2% 25% Political dialogue 1% 1% 8% Research and technology 0% 6% 38% Public administration 0% 6% 5% Consumer protection 0% 5% 38% Mining 0% 5% 13% Education and training 0% 4% 33% Information society 0% 4% 15% Innovation policies 0% 4% 5% Illegal immigration 0% 3% 23% Illicit drugs 0% 3% 3% Economic policy dialogue 0% 2% 43% Cultural cooperation 0% 2% 38% Financial assistance 0% 2% 25% Audiovisual 0% 2% 18% Terrorism 0% 2% 8% Money laundering 0% 2% 3% Health 0% 1% 38% Human rights 0% 1% 3% Nuclear safety 0% 0% 15% Civil protection 0% 0% 5% Source: Mattoo, Mulabdic and Ruta (2022). 14 Table A2: Description of policy areas covered in the Content of Deep Trade Agreements database WTO-plus areas Tariffs on Tariff liberalization on industrial goods; elimination of non-tariff measures manufacturing goods Tariffs on Tariff liberalization on agriculture goods; elimination of non-tariff measures agricultural goods Customs Provision of information; publication on the Internet of new laws and regulations; training Export Taxes Elimination of export taxes SPS Affirmation of rights and obligations under the WTO Agreement on SPS; harmonization of SPS measures TBT Affirmation of rights and obligations under WTO Agreement on TBT; provision of information; harmonization of regulations; mutual recognition agreements STE Establishment or maintenance of an independent competition authority; nondiscrimination regarding production and marketing condition; provision of information; affirmation of Art XVII GATT provision AD Retention of Antidumping rights and obligations under the WTO Agreement (Art. VI GATT). CVM Retention of Countervailing measures rights and obligations under the WTO Agreement (Art VI GATT) State Aid Assessment of anticompetitive behaviour; annual reporting on the value and distribution of state aid given; provision of information Public Progressive liberalisation; national treatment and/or non-discrimination principle; publication Procurement of laws and regulations on the Internet; specification of public procurement regime TRIMs Provisions concerning requirements for local content and export performance of FDI GATS Liberalisation of trade in services TRIPs Harmonisation of standards; enforcement; national treatment, most-favoured nation treatment WTO-X areas Anti-Corruption Regulations concerning criminal offence measures in matters affecting international trade and investment Competition Maintenance of measures to proscribe anticompetitive business conduct; harmonisation of Policy competition laws; establishment or maintenance of an independent competition authority Environmental Development of environmental standards; enforcement of national environmental laws; Laws establishment of sanctions for violation of environmental laws; pubblications of laws and regulation IPR Accession to international treaties not referenced in the TRIPs Agreement Investment Information exchange; Development of legal frameworks; Harmonisation and simplification of procedures; National treatment; establishment of mechanism for the settlement of disputes Labour Market Regulation of the national labour market; affirmation of International Labour Organization Regulation (ILO) commitments; enforcement Movement of Liberalisation of capital movement; prohibition of new restrictions Capital Consumer Harmonisation of consumer protection laws; exchange of information and experts; training Protection Data Protection Exchange of information and experts; joint projects Agriculture Technical assistance to conduct modernisation projects; exchange of information Approximation Application of EC legislation in national legislation of Legislation Audio Visual Promotion of the industry; encouragement of co-production Civil Protection Implementation of harmonised rules 15 Innovation Participation in framework programmes; promotion of technology transfers Policies Cultural Promotion of joint initiatives and local culture Cooperation Economic Policy Exchange of ideas and opinions; joint studies Dialogue Education and Measures to improve the general level of education Training Energy Exchange of information; technology transfer; joint studies Financial Set of rules guiding the granting and administration of financial assistance Assistance Health Monitoring of diseases; development of health information systems; exchange of information Human Rights Respect for human rights Illegal Conclusion of re-admission agreements; prevention and control of illegal immigration Immigration Illicit Drugs Treatment and rehabilitation of drug addicts; joint projects on prevention of consumption; reduction of drug supply; information exchange Industrial Assistance in conducting modernisation projects; facilitation and access to credit to finance Cooperation Information Exchange of information; dissemination of new technologies; training Society Mining Exchange of information and experience; development of joint initiatives Money Harmonisation of standards; technical and administrative assistance Laundering Nuclear Safety Development of laws and regulations; supervision of the transportation of radioactive materials Political Convergence of the parties’ positions on international issues Dialogue Public Technical assistance; exchange of information; joint projects; Training Administration Regional Promotion of regional cooperation; technical assistance programmes Cooperation Research and Joint research projects; exchange of researchers; development of public-private partnership Technology SME Technical assistance; facilitation of the access to finance Social Matters Coordination of social security systems; non-discrimination regarding working conditions Statistics Harmonisation and/or development of statistical methods; training Taxation Assistance in conducting fiscal system reforms Terrorism Exchange of information and experience; joint research and studies Visa and Asylum Exchange of information; drafting legislation; training Source: Hofmann, Osnago, and Ruta (2017). 16 Appendix B: Empirical strategy This annex presents the data and empirical strategy used by Mulabdic, Osnago and Ruta (2017) and Mattoo, Mulabdic and Ruta (2022) to identify the elasticity of trade to depth which is used to compute changes in bilateral trade flows. Both studies rely on a standard gravity model that explicitly accounts for the depth of trade agreements instead of a dummy variable to capture the presence of a trade agreement (see Head and Mayer, 2014; Limão, 2016). The empirical specification is based on the following equation: = {1 ℎ + + + } + (1) where is bilateral exports from country i to country j in year t, ℎ is the number of legally enforceable provisions in the trade agreement between i and j (normalized between 0 and 1), and are importer-time and exporter-time fixed effects that account for country-time specific shocks and the multilateral resistance terms (Anderson and van Wincoop, 2003, 2004). Finally, is a set of undirected country-pair fixed effects that captures all the time-invariant determinants of trade costs and addresses the endogeneity in PTAs formation (Baier and Bergstrand, 2007). To account for the presence of zeroes in trade flows, they estimate equation (1) using the Poisson pseudo maximum-likelihood (PPML) estimator proposed by Santos Silva and Tenreyro (2006). Mulabdic et al. (2017) use data from the World Input Output Database (WIOD), which include information on intra-national flows, on goods, services and value added trade for 40 countries to estimate a gravity equation augmented with a measure of depth for the period 1995-2011. Similarly, Mattoo, Mulabdic and Ruta (2022) estimate equation (1) using data from UNComtrade on goods trade for a sample of 96 countries for the 2002-2014 period. 17 References: Anderson, James E., and Eric van Wincoop. 2003. “Gravity with Gravitas: A Solution to the Border Puzzle.” American Economic Review 93 (1): 170–92. ———. 2004. “Trade Costs.” Journal of Economic Literature 42 (3): 691–751. Baier, Scott L., and Jeffrey H. 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