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Playing by the Rules? The Development of an Amended Index to Measure the Impact of Rules of Origin on Intra-PTA Trade Flows

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  • Sinéad Kelleher

    (University College Dublin)

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    Abstract

    Rules of Origin (RoO) are essential components of any preferential trade agreement (PTA) short of a full customs union. The recent proliferation of PTAs has led to increased interest in the effects of RoO with empirical estimates consistently showing that they act as barriers to intra-PTA trade. However, this paper argues that the indices of RoO restrictiveness currently used in empirical analysis are flawed as they focus solely on product specific RoO and do not incorporate information on regime wide provisions, that is, those rules that apply across all goods in a particular agreement. As such, they do not capture fully the effective restrictiveness of a given RoO. In order to address this issue, this paper weights the Harris Index of RoO restrictiveness by three regime wide provisions; the size of the Cumulation Zone, the de minimis allowance, and certification type. The resulting new measure, the Regime Weighted Harris Index (RWHI), is then each used in both OLS and IV regressions to measure the impact of RoO on intra-PTA trade flows. Across an eleven year panel of 90 country-pairs, a negative effect of RoO on intra-PTA trade is found using OLS. However, the results of an IV regression suggest that the situation is somewhat more complicated, with RoO actually promoting trade flows in certain product groups. This is the first attempt in the literature to develop an instrument for RoO restrictiveness which constitutes a second source of value added for this paper.

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    File URL: http://www.ucd.ie/t4cms/WP12_22.pdf
    File Function: First version, 2012
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    Bibliographic Info

    Paper provided by School Of Economics, University College Dublin in its series Working Papers with number 201222.

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    Length: 33 pages
    Date of creation: 13 Sep 2012
    Date of revision:
    Handle: RePEc:ucn:wpaper:201222

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    Keywords: Rules of Origin; International Trade Agreements; Nontariff Barriers;

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    1. Richard Baldwin & Daria Taglioni, 2006. "Gravity for Dummies and Dummies for Gravity Equations," NBER Working Papers 12516, National Bureau of Economic Research, Inc.
    2. Antoni Estevadeordal & Kati Suominen & Jeremy Harris & José Ernesto López-Córdova, . "Gatekeepers of Global Commerce: Rules of Origin and International Economic Integration," IDB Publications 16558, Inter-American Development Bank.
    3. Francois, Joseph & Hoekman, Bernard & Manchin, Miriam, 2005. "Preference erosion and multilateral trade liberalization," Policy Research Working Paper Series 3730, The World Bank.
    4. Hummels, David & Levinsohn, James, 1995. "Monopolistic Competition and International Trade: Reconsidering the Evidence," The Quarterly Journal of Economics, MIT Press, vol. 110(3), pages 799-836, August.
    5. Portugal-Perez, Alberto, 2009. "Assessing the impact of political economy factors on rules of origin under NAFTA," Policy Research Working Paper Series 4848, The World Bank.
    6. James E. Anderson & Eric van Wincoop, 2004. "Trade Costs," Journal of Economic Literature, American Economic Association, vol. 42(3), pages 691-751, September.
    7. James E. Anderson & Eric van Wincoop, 2003. "Gravity with Gravitas: A Solution to the Border Puzzle," American Economic Review, American Economic Association, vol. 93(1), pages 170-192, March.
    8. Peter Egger & Michael Pfaffermayr, 2003. "The proper panel econometric specification of the gravity equation: A three-way model with bilateral interaction effects," Empirical Economics, Springer, vol. 28(3), pages 571-580, July.
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