This paper studies how the integration into a deep Regional Trade Agreement affects sector level productivity. Using the EU
as an example, we construct an integration indicator that measures integration into the Single Market relative to global value
chains. The results of a simultaneous equation model show an overall positive effect of integration on labour productivity,
which is driven by upstream integration. Market distortions in regional value chains accumulate downstream and negatively
affect productivity. Better domestic institutions facilitate the integration process at the industry level for both Member
States and Non-Member States. Then again, better institutions seem to be more favourable to the integration of industries
with less complex product portfolios and lower levels of knowledge cumulativeness.