An Alternative Trade Agreement Design for Global Value Chain Integration

The import tariff system has made a harmful dent in the global trading system. To avoid this, many countries have chosen the second‐best option: a Free Trade Agreement (FTA). The first‐best, devoid of any tariff barriers in the global trading system, is close to impossible to achieve. FTAs, due to their structural factors like stringent Rules of Origin and other non‐tariff measures, have not been very successful for several countries. Additionally, they have been discriminatory to non‐contracting parties. Despite having the potential to establish and strengthen the Global value chains, FTAs have done a dismal work in this dimension, too. To overcome this limitation, we propose in this article a new mechanism called ‘Sectoral Trade Agreement (STA)’, which is an FTA among all major producing countries in a particular sector or industry. In this article, an STA in the automobile sector has been compared with the traditional bilateral FTA with different utilization rates. In our CGE‐based study, welfare as a total rises in STA compared to FTA scenarios. Welfare increases also for some non‐participating blocks. Further, it is shown here how a composite scenario where both FTA and STA are functioning is a better option for trade liberalization and how this could be a new ‘second‐best’.