EU Trade Diversification Through Regional Trade Agreements

This paper evaluates the effects of the European Union’s (EU) regional trade agreements (RTAs) on trade patterns, with a particular focus on diversification. Using a structural gravity model with data for 170 industries, we exploit variation in RTA depth, measured by the number of legally enforceable provisions, to estimate the effects of deep trade agreements, allowing for heterogeneity across sectors. We then use these estimates to evaluate recent and prospective EU agreements, including EU–Mercosur and EU–India, by analyzing their legal texts and constructing novel measures of agreement depth. The results show that deeper RTAs significantly increase bilateral trade, with substantial sectoral heterogeneity, and promote diversification across products and trading partners. Counterfactual general equilibrium simulations indicate that new agreements further strengthen diversification by reducing import concentration, including in green and strategic sectors, thereby enhancing supply chain resilience.