The Impact of Rules of Origin On Trade Flows

Within any preferential trade agreement (PTA) origin rules exist in order to prevent third countries from taking advantage of the PTA concessions. The rules thus are there to preserve the existing external protection of countries within the PTA. However, depending on their formulation, they can also increase that level of external protection, resulting in trade suppression and trade diversion. This paper provides the first serious empirical examination of the possible impact of rules of origin on patterns of trade in the European context. The methodology employed is that of an augmented gravity model where we focus on the impact within the Pan-european system of cumulation. The results suggest that rules of origin do indeed restrict trade, that the cumulation of such rules could increase trade in the order of 50%, and that the impact is greater on intermediate than manufacturing trade.