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Firm Heterogeneity, Rules of Origin and Rules of Cumulation

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We analyse the impact of relaxing rules of origin (ROOs) in a simple setting with heterogeneous firms that buy intermediate inputs from domestic and foreign sources. In particular, we consider the impact of switching from bilateral to diagonal cumulation when using preferences (instead of paying the MFN tariff) involving the respect of rules of origin. We find that relaxing the restrictiveness of the ROOs leads the least productive exporters to stop exporting. The empirical part confirms these results. We use the most recent techniques developed by Helpman, Melitz and Rubinstein (2007) on highly disaggregated data (HS6 digit) to analyse the effects of the introduction of the Pan-European Cumulation System (PECS). We find that PECS reverses the negative impact of strict ROOs on intermediate trade which turns positive as a consequence of introducing diagonal ROCs.

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Paper provided by Economics Section, The Graduate Institute of International Studies in its series IHEID Working Papers with number 09-2008.

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Length: 39
Date of creation: Oct 2008
Date of revision:
Handle: RePEc:gii:giihei:heidwp09-2008

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Keywords: Intermediate goods; Rules of origin; Rules of cumulation; Firm heterogeneity; Gravity.;

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Cited by:
  1. Ivan Cherkashin & Svetlana Demidova & Hiau Looi Kee & Kala Krishna, 2010. "Firm Heterogeneity and Costly Trade: A New Estimation Strategy and Policy Experiments," NBER Working Papers 16557, National Bureau of Economic Research, Inc.

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