Supply chain trade creation and diversion effects of free trade agreements

We employ a structural gravity framework to examine whether FTAs have distinct effects on supply chain trade. Our method makes two contributions: quantifying the supply chain creation and diversion effects using a GVC accounting methodology, and disentangling the trade effects of preferential tariffs from behind-the-border provisions. Our findings show that the creation effect on member countries substantially outweighs the diversion effect on non-members. We find that the creation effect is driven jointly by tariff reductions and deep provisions, while the diversion effect is explained primarily by tariff concessions, suggesting that deep FTA provisions can generate positive spillovers for third countries.