The Effects of Preferential Rules of Origin on Korean Supply Chains

This study analyzes how Korea’s regional supply chain have been affected by the rules of origin of major FTAs to which Korea is a signatory party. When new rules of origin are introduced following the conclusion of an FTA, Korean final goods producers have two options. Option one: they can modify the production process by changing the source country to meet the rules of origin stipulations and enjoy preferential tariff benefits agreed to by FTA signatories Option two: they can give up preferential tariff benefits and source their inputs from the most efficient provider. In other words, depending on the preferential tariff benefits stipulated by an FTA and the magnitude of costs incurred, final goods producers decide whether to change the source country of their intermediate inputs. In order to analyze if Korean final goods producers have changed sourcing decisions due to FTA stipulations, this study focuses on the rules of origin major FTAs to which Korea is a signatory party, the Korea-US FTA, the Korea-EU FTA, and the Korea-China FTA. We quantify the level of restrictions imposed by the rules of origin outlined by each FTA on intermediate inputs and empirically analyze changes in imports in intermediate goods from the United States, EU, and China and those from the other countries to explore how the rules of origin imposed on final goods affects domestic producers’ sourcing decisions.