Labor provisions in preferential trade agreements : are they a source of uncertainty?

Abstract

In recent work, trade policy uncertainty (TPU) has been identified as a factor that negatively affects the export performance of countries by decreasing the entry of firms. In this paper, I address the question of whether the enforceability of non-trade related provisions in Preferential Trade Agreements (PTAs) that depend on firms' decisions have as a consequence raising uncertainty. In the model, firms can decide whether to commit to labor standards. Not doing so increases the probability of losing industry-specific preferences, an externality for the whole industry. I identify a situation in which two countries have received two different levels of enforceability and scope of labor provisions in PTAs with the US and test whether their entry into force eliminated uncertainty. Although I do not find evidence of differential uncertainty, I find that in Peru, the country with the allegedly highest enforceability level, uncertainty was not eliminated. Moreover, I find weak evidence that sectors that are negatively affected are those facing a higher threat.