The impact of rules of origin on trade flows
type="main" xml:lang="en"> A great deal of post-war trade liberalization resulted from regional, preferential trade agreements. Preferential trade agreements cut tariffs on goods originating only in those nations that have signed the agreement. Therefore, they need ‘rules of origin’ to determine which goods benefit from the tariff cut. Rules of origin have long been ignored for two good reasons: they are dauntingly complex and at first sight appear mind-numbingly dull. The third standard reason for ignoring them – the assertion that they do not matter much – turns out to be wrong. We show that rules of origin are important barriers to trade. Moreover, such rules are emerging as an important trade issue for three additional reasons. First, preferential trade deals are proliferating worldwide. Second, the global fragmentation of production implies complex international supply chains which are particularly constrained and distorted by rules of origin. Third, the extent to which regionalism challenges the WTO-based trading system depends in part on incompatibilities and rigidities built into rules of origin. Our empirical results exploit a ‘natural experiment’ that was created by technical changes to Europe's lattice of rules of origin (ROOs) in 1997. This change, known as ‘diagonal cumulation’, relaxed the restrictiveness of rules of origin on trade among the EU's free trade agreement (FTA) partners without changing the degree of tariff preference. Our analysis allows us to establish a lower-bound and upper-bound estimate of trade impact of ROOs reduced trade among the EU's trade partners. The lower bound we find is something like 10% while the upper bound is around 70%. The second part of the paper draws the policy lessons that arise from considering the implications of our empirical findings. The most direct lessons are for FTA-writers. We argue that Europe's implementation of ‘cumulation’ is a good way of reducing the welfare-reducing impact of overlapping rules of origin without gutting their fraud-fighting ability. We also suggest a three-part procedure for establishing a more multilateral framework for rules of origin which would be more transparent, flexible, administratively feasible and negotiable. — Patricia Augier, Michael Gasiorek and Charles Lai-Tong
If you experience problems downloading a file, check if you have the proper application to view it first. In case of further problems read the IDEAS help page. Note that these files are not on the IDEAS site. Please be patient as the files may be large.
As the access to this document is restricted, you may want to look for a different version under "Related research" (further below) or search for a different version of it.
Volume (Year): 20 (2005)
Issue (Month): 43 (07)
|Contact details of provider:|| Postal: 3rd Floor, 77 Bastwick Street, London EC1V 3PZ|
Phone: +44 (0)20 7183 8801
Fax: +44 (0)20 7183 8820
Web page: http://www.blackwellpublishing.com/journal.asp?ref=0266-4658
More information through EDIRC
Postal:Schackstr. 4, 80539 Munich
Phone: +49 (89) 2180-2748
Fax: +49 (89) 39 73 03
Web page: http://www.cesifo-group.de/portal/page/portal/ifoHome/f-about/f2aboutces
More information through EDIRC
Postal:48 boulevard Jourdan - 75014 Paris
Phone: 01 43 13 63 00
Fax: 01 43 13 63 10
Web page: http://www.pse.ens.fr/
More information through EDIRC
|Order Information:||Web: http://www.blackwellpublishing.com/subs.asp?ref=0266-4658|
References listed on IDEAS
Please report citation or reference errors to , or , if you are the registered author of the cited work, log in to your RePEc Author Service profile, click on "citations" and make appropriate adjustments.:
- Rod Falvey & Geoff Reed, 1998.
"Economic effects of rules of origin,"
Review of World Economics (Weltwirtschaftliches Archiv),
Springer;Institut für Weltwirtschaft (Kiel Institute for the World Economy), vol. 134(2), pages 209-229, June.
- Kala Krishna & Motoshige Itoh, 1988.
"Content Protection and Oligopolistic Interactions,"
Review of Economic Studies,
Oxford University Press, vol. 55(1), pages 107-125.
- Bergstrand, Jeffrey H, 1985. "The Gravity Equation in International Trade: Some Microeconomic Foundations and Empirical Evidence," The Review of Economics and Statistics, MIT Press, vol. 67(3), pages 474-81, August.
- Ju, J. & Krishna, K., 1996.
"market Access and Welfare Effects of Free Trade Areas without Rules of origin,"
2-96-1, Pennsylvania State - Department of Economics.
- Jiandong Ju & Kala Krishna, . "Market Access and Welfare Effects of Free Trade Areas without Rules of Origin," EPRU Working Paper Series 96-03, Economic Policy Research Unit (EPRU), University of Copenhagen. Department of Economics.
- Ju, J. & Krishna, K., 1995. "Market Access and Welfare Effects of Free Trade Areas Without Rules of Origin," Papers 11-95-3a, Pennsylvania State - Department of Economics.
- Jiandong Ju & Kala Krishna, 1996. "Market Access and Welfare Effects of Free Trade Areas without Rules of Origin," NBER Working Papers 5480, National Bureau of Economic Research, Inc.
- Alan Deardorff, 1998.
"Determinants of Bilateral Trade: Does Gravity Work in a Neoclassical World?,"
in: The Regionalization of the World Economy, pages 7-32
National Bureau of Economic Research, Inc.
- Deardorff, A.V., 1995. "Determinants of Bilateral Trade : Does Gravity Work in a Neoclassical World?," Papers 95-05, Michigan - Center for Research on Economic & Social Theory.
- Alan V. Deardorff, 1995. "Determinants of Bilateral Trade: Does Gravity Work in a Neoclassical World?," NBER Working Papers 5377, National Bureau of Economic Research, Inc.
- Jiandong Ju & Kala Krishna, 1998.
"Firm Behavior and Market Access in a Free Trade Area with Rules of Origin,"
NBER Working Papers
6857, National Bureau of Economic Research, Inc.
- Jiandong Ju & Kala Krishna, 2005. "Firm behaviour and market access in a Free Trade Area with rules of origin," Canadian Journal of Economics, Canadian Economics Association, vol. 38(1), pages 290-308, February.
- Rod Falvey & Geoff Reed, .
"Rules of Origin as Commercial Policy Instruments,"
EPRU Working Paper Series
97-20, Economic Policy Research Unit (EPRU), University of Copenhagen. Department of Economics.
- Hummels, David & Ishii, Jun & Yi, Kei-Mu, 2001.
"The nature and growth of vertical specialization in world trade,"
Journal of International Economics,
Elsevier, vol. 54(1), pages 75-96, June.
- David L. Hummels & Jun Ishii & Kei-Mu Yi, 1999. "The nature and growth of vertical specialization in world trade," Staff Reports 72, Federal Reserve Bank of New York.
- P. J. Lloyd, 1993. "A Tariff Substitute for Rules of Origin in Free Trade Areas," The World Economy, Wiley Blackwell, vol. 16(6), pages 699-712, November.
- D Evans, 2000. "Options for Regional Integration in Southern Africa," South African Journal of Economics, Economic Society of South Africa, vol. 68(4), pages 293-304, December.
- Arvind Panagariya & Rupa Duttagupta, 2003.
"Free Trade Areas and Rules of Origin; Economics and Politics,"
IMF Working Papers
03/229, International Monetary Fund.
- Rupa Duttagupta & Arvind Panagariya, 2007. "Free Trade Areas And Rules Of Origin: Economics And Politics," Economics and Politics, Wiley Blackwell, vol. 19(2), pages 169-190, 07.
- Arvind Panagariya & Rupa Dutta Gupta, 2003. "Free Trade Areas and Rules of Origin: Economics and Politics," International Trade 0308006, EconWPA.
- Sapir, Andre, 1998.
"The political economy of EC regionalism,"
European Economic Review,
Elsevier, vol. 42(3-5), pages 717-732, May.
- Laszlo Matyas, 1997. "Proper Econometric Specification of the Gravity Model," The World Economy, Wiley Blackwell, vol. 20(3), pages 363-368, 05.
- Jeffrey A. Frankel, 1997. "Regional Trading Blocs in the World Economic System," Peterson Institute Press: All Books, Peterson Institute for International Economics, number 72, January.
- Kala Krishna & Anne Krueger, 1995. "Implementing Free Trade Areas: Rules of Origin and Hidden Protection," NBER Working Papers 4983, National Bureau of Economic Research, Inc.
- Paul Brenton & Miriam Manchin, 2002.
"Making EU Trade Agreements Work: The Role of Rules of Origin,"
- Paul Brenton & Miriam Manchin, 2003. "Making EU Trade Agreements Work: The Role of Rules of Origin," The World Economy, Wiley Blackwell, vol. 26(5), pages 755-769, 05.
- Paul Brenton & Miriam Manchin, 2002. "Making EU Trade Agreements Work: The Role of Rules of Origin," wiiw Balkan Observatory Working Papers 27, The Vienna Institute for International Economic Studies, wiiw.
- Deardorff, A.V., 2000.
"International Provision of Trade Services, Trade, and Fragmentation,"
463, Research Seminar in International Economics, University of Michigan.
- Deardorff, Alan V, 2001. "International Provision of Trade Services, Trade, and Fragmentation," Review of International Economics, Wiley Blackwell, vol. 9(2), pages 233-48, May.
- Deardorff, Alan V., 2001. "International provision of trade services, trade, and fragmentation," Policy Research Working Paper Series 2548, The World Bank.
- Panagariya, Arvind & Krishna, Pravin, 2002. "On necessarily welfare-enhancing free trade areas," Journal of International Economics, Elsevier, vol. 57(2), pages 353-367, August.
- Ronald W. Jones & Sugata Marjit, 2001. "The Role of International Fragmentation in the Development Process," American Economic Review, American Economic Association, vol. 91(2), pages 363-366, May.
- Anne O. Krueger, 1993. "Free Trade Agreements as Protectionist Devices: Rules of Origin," NBER Working Papers 4352, National Bureau of Economic Research, Inc.
- Cockburn, John & Decaluwe, Bernard & Dostie, Benoît, 1998. "Les leçons du mariage entre les modèles d'équilibre général calculable et la nouvelle théorie du commerce international: application à la Tunisie," Cahiers de recherche 9804, Université Laval - Département d'économique.
When requesting a correction, please mention this item's handle: RePEc:bla:ecpoli:v:20:y:2005:i:43:p:567-624. See general information about how to correct material in RePEc.
For technical questions regarding this item, or to correct its authors, title, abstract, bibliographic or download information, contact: (Wiley-Blackwell Digital Licensing)or (Christopher F. Baum)
If you have authored this item and are not yet registered with RePEc, we encourage you to do it here. This allows to link your profile to this item. It also allows you to accept potential citations to this item that we are uncertain about.
If references are entirely missing, you can add them using this form.
If the full references list an item that is present in RePEc, but the system did not link to it, you can help with this form.
If you know of missing items citing this one, you can help us creating those links by adding the relevant references in the same way as above, for each refering item. If you are a registered author of this item, you may also want to check the "citations" tab in your profile, as there may be some citations waiting for confirmation.
Please note that corrections may take a couple of weeks to filter through the various RePEc services.