TPP Risks and TTIP Opportunities: Rules of Origin, Trade Diversion, and Developing Countries

Free trade agreements rarely result in completely free trade. Even when trade agreements eliminate tariffs, they sometimes use rules of origin to continue restricting trade. Trade agreements need rules of origin to keep third parties from exploiting them by transshipping goods through a beneficiary country. But the rules are often more restrictive than they need to be to prevent this. Moreover, they tend to be more restrictive in sensitive sectors with the highest tariffs: agriculture and labor-intensive manufacturers where developing countries have comparative advantage. The rules of origin in the “mega-regional” trade agreements in the Pacific and across the Atlantic will help to determine the impact on developing countries inside and outside these agreements. In the recently-concluded Trans-Pacific Partnership involving the United States and eleven other Pacific Rim countries, the rules of origin for textiles and apparel are particularly restrictive and will reduce Vietnam’s expected benefits from the agreement. To the degree that Vietnam does benefit, it could be at the expense of even poorer countries in the region unless the United States takes steps to mitigate the impact of trade diversion. In the Transatlantic Trade and Investment Partnership between the United States and European Union, trade diversion in final goods is less of a concern. But restrictive rules of origin could disrupt supply chains that currently include developing countries. Simple and flexible rules of origin, with a broad cumulation zone, would help to prevent this.