The Impact of Rules of Origin on Trade Flows

University of Sussex, Brighton, England, United Kingdom
Economic Policy (Impact Factor: 2.33). 02/2005; 20(43):567-624. DOI: 10.1111/j.1468-0327.2005.00146.x
Source: RePEc


A great deal of post-war trade liberalization resulted from regional, preferential trade agreements. Preferential trade agreements cut tariffs on goods originating only in those nations that have signed the agreement. Therefore, they need ‘rules of origin’ to determine which goods benefit from the tariff cut. Rules of origin have long been ignored for two good reasons: they are dauntingly complex and at first sight appear mind-numbingly dull. The third standard reason for ignoring them – the assertion that they do not matter much – turns out to be wrong. We show that rules of origin are important barriers to trade. Moreover, such rules are emerging as an important trade issue for three additional reasons. First, preferential trade deals are proliferating worldwide. Second, the global fragmentation of production implies complex international supply chains which are particularly constrained and distorted by rules of origin. Third, the extent to which regionalism challenges the WTO-based trading system depends in part on incompatibilities and rigidities built into rules of origin.
Our empirical results exploit a ‘natural experiment’ that was created by technical changes to Europe's lattice of rules of origin (ROOs) in 1997. This change, known as ‘diagonal cumulation’, relaxed the restrictiveness of rules of origin on trade among the EU's free trade agreement (FTA) partners without changing the degree of tariff preference. Our analysis allows us to establish a lower-bound and upper-bound estimate of trade impact of ROOs reduced trade among the EU's trade partners. The lower bound we find is something like 10% while the upper bound is around 70%. The second part of the paper draws the policy lessons that arise from considering the implications of our empirical findings. The most direct lessons are for FTA-writers. We argue that Europe's implementation of ‘cumulation’ is a good way of reducing the welfare-reducing impact of overlapping rules of origin without gutting their fraud-fighting ability. We also suggest a three-part procedure for establishing a more multilateral framework for rules of origin which would be more transparent, flexible, administratively feasible and negotiable.
— Patricia Augier, Michael Gasiorek and Charles Lai-Tong

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    • "Therefore, the exporters to A and B need to prove intra-FTA originating status in order to obtain a reduced or free customs duty access to each other's market. If, for example, A and C sign a similar FTA as do countries A and B, both goods – goods originating in B and goods originating in C would have preferential access to country A. However, goods produced in B, using intermediates from C, which do not meet the rules granting originating status for exporters from B (according to the rules applied between A and B), would then be subject to non-preferential status when exported to A. Hence, goods directly exported from C to A would be granted preferential access, but goods exported from B using intermediates from C in this case would not be granted preferential access [11]. A means of overcoming this is to allow for cumulation of the use of materials or processes across countries with parallel or overlapping FTAs. "

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    • "6 The fourth hypothesis predicts that the RoO adopted with the Barcelona process could have a positive effect on trade of final goods or could induce an effect on trade on intermediated goods and promote the creation of a production network. Augier et al. (2005) point out that moving to a system of diagonal cumulation of origin widens the possible source of intermediate suppliers to all those countries which are part of that system. Therefore, exporters of the Mediterranean countries could use intermediate goods from more efficient partners inside the agreement or from the rest of the world (RoW). "
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