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Yang Jijun | The Impact of Competition Clauses in Regional Trade Agreements and Third - Party Signal

Recently, the Center for International Finance and Economics Research (CIFER) of the National Institute of Financial Research at Tsinghua University hosted...Academic Symposium on "2022 International Trade Disputes and the Restructuring of Globalization"The event was successfully held.School of International Economics and Trade, Nanjing University of Finance and EconomicsProfessor andVice DeanYang JijunAttendDepend onCIFERAssistant Research Fellow, Tsinghua University PBC School of Finance (Postdoctoral Fellow)Li YuankunHostTrade disputesFDIWith innovationSub-forum 3Sharing with collaborators (as shown below) titled《The impact of competition clauses in regional trade agreements and the third-party signaling effect on foreign direct investment》(Competitive Clauses in Regional Trade Agreements, Third-party Signaling Effects and the Choice of China's Competition Policy Choices) The article.

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Yang Jijun is a professor, doctoral supervisor, and vice dean at Nanjing University of Finance and Economics. Chief Expert of a Major Bidding Project of the National Social Science Fund of China. Selected as a Cultural Master and one of the "Four Batches" of Outstanding Young Talents by the Publicity Department of the Central Committee of the Communist Party of China, a first-level cultivation target of Jiangsu Province's "333 Project," a Jiangsu Province Outstanding Young and Middle-aged Expert, a high-level talent of Jiangsu Province's "Six Major Talent Peaks," and the leader of an excellent teaching team in Jiangsu Province's "Blue Project." Also serves as a peer reviewer for the National Natural Science Foundation of China, a peer reviewer for the National Social Science Fund of China, and a council member of the China Society for World Economics. Has published numerous papers in journals such as *Chinese Social Sciences* (first author, 3 papers), and has presided over 4 national-level projects, including a major project of the National Social Science Fund of China and a general project of the National Natural Science Foundation of China. His achievements have won the Ministry of Education's Higher Education Outstanding Scientific Research Achievement Award, the 3rd "Liu Shibai Economics Award," the first prize of the 14th Jiangsu Provincial Outstanding Theoretical Achievement Award in Philosophy and Social Sciences, the second prize of the 15th Jiangsu Provincial Outstanding Theoretical Achievement Award in Philosophy and Social Sciences, and the first prize of the 16th Jiangsu Provincial Outstanding Theoretical Achievement Award in Philosophy and Social Sciences.

Yang Jijun

This article primarily studies how competition policies in regional trade agreements affect foreign direct investment (FDI) inflows from the perspective of the signaling effect. Referring to Kerner's (2009) research, the article argues that regional trade agreements have a "signaling effect," meaning that potential host countries, by signing such agreements, send a signal that they have a favorable investment environment and actively protect investor interests, further attracting investment from "third parties" who have not yet signed trade agreements. The main findings are: First, competition policies in regional trade agreements significantly increase FDI inflows to contracting parties under the "signaling effect." Furthermore, the higher the depth of the agreement text, the more fully the dispute settlement mechanism is incorporated, the higher the cost for the host government to misappropriate foreign investment, and the more credible the commitments, the more pronounced the positive effect on FDI. Second, categorical regression analysis reveals that procedural and substantive clauses have a significant positive effect on attracting FDI; the "European model," which emphasizes the introduction of substantive rules, has a significant positive effect on attracting FDI. Third, regional trade agreement competition policy, as a "secondary signal," has a "compensatory effect" on the host country's domestic competition law (or "primary signal"). In countries with imperfect competition laws and high political risks, the investment attraction effect of incorporating competition policy into trade agreements is more significant.

The author proposes three main innovations in this article. First, unlike Lin Mengyao and Zhang Zhongyuan (2019), who emphasized the "commitment effect," this article argues that the key to regional trade agreement competition policies promoting foreign investment inflows lies in the "signaling effect." The higher the depth of the competition policy level in a regional trade agreement, the stronger the signal effect of the host country in protecting fair competition, which is more conducive to attracting foreign investment. Second, it identifies the "compensation" and "repair" mechanisms of competition clauses in regional trade agreements on the host country's competition rules. On the one hand, countries with poor institutional environments and high political risks experience more significant investment effects from signing regional trade agreements; on the other hand, host countries tend to improve their domestic competition legislation through institutional isomorphism, directly regulating domestic anti-competitive behavior through competition clauses in regional trade agreements. Third, it conducts textual analysis based on a regional trade agreement database, using a level measurement method to measure the depth of competition policy clauses in regional trade agreements. This overcomes the shortcomings of simply setting regional trade agreements as dummy variables and helps to capture more specific content within the competition policy of regional trade agreements.

The article then summarizes three hypotheses through theoretical analysis: Hypothesis 1: Competition clauses in regional trade agreements can increase FDI inflows through a "signaling effect." The deeper the content of the agreement text, the greater the cost for the host country government to implement nationalization policies, and the stronger the signaling effect. Hypothesis 2: Competition policies in regional trade agreements (or "secondary signals") have a "compensatory effect" on the host country's domestic competition law (or "primary signal"). In countries with imperfect competition laws and high political risks, the investment attraction effect of incorporating competition policies into trade agreements is more significant. Hypothesis 3: For host countries with incomplete competition legislation systems, competition policies in regional trade agreements have a "restorative effect" on their domestic competition policies. That is, the "signaling effect" of competition policy clauses can attract foreign direct investment inflows by improving the host country's institutional environment.

The empirical section of this article introduces the "third-party signaling effect" into a quantitative model of the impact of competition clauses in regional trade agreements on foreign direct investment (FDI). It selects "third-party signaling effect" as the core explanatory variable and "FDI flows" as the explained variable, while controlling for gravity variables, host country characteristics, home country characteristics, and bilateral country characteristics. The specific model is as follows. The basic data used are mainly from the regional trade agreement database provided by the World Trade Organization, the OECD International Investment Statistics Database, the World Bank WDI Database, and the CEPII Database, covering the period from 2004 to 2019.

Liu Bin

Institute of World Trade Organization, University of International Business and EconomicsresearcherLiu Bin The article's theoretical, applied, and innovative points were summarized, noting its strong alignment with national policies and its practical, grounded approach, demonstrating both theoretical depth and practical relevance. Following this, Liu Bin offered several suggestions: First, regarding econometric methods, he suggested considering the use of multi-timepoint DID (Different Time Point Analysis) and the introduction of bilateral trade agreements as a control variable. Second, regarding variable measurement, for competition policy calculations, he suggested using the text of a specific trade agreement as a benchmark, and further considering vertical depth measurement beyond horizontal analysis of existing content. Third, regarding extended analysis, he suggested further consideration of the competitive clauses signed between "European model" and "North American model" countries and other regions or countries; and whether the "signaling effect" exhibits heterogeneity between developed and developing countries, for example, by considering the heterogeneity of competition clause implementation based on national industrial bases (or different countries' investment attraction policies). Finally, Liu Bin also suggested revising the article's "competitive neutrality" policy statement and raised questions regarding the potential "transfer effect" of regional trade agreements on FDI.

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