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Why OECD Countries Should Reform Rules of Origin

  • Olivier Cadot
  • Jaime de Melo

With preferential trade agreements on the rise worldwide rules of origin--which are necessary to prevent trade deflection--are attracting increasing attention. At the same time, preference erosion for Generalized System of Preferences (GSP) recipients is increasing resistance to further multilateral negotiations. Drawing on different approaches, this article shows that the current system of rules of origin that is used by the European Union and the United States in preferential trade agreements (including the GSP) and that is similar to systems used by other Organisation for Economic Co-operation and Development countries should be drastically simplified if developed economies really want to help developing economies integrate into the world trading system. In addition to diverting resources for administrative tasks, current rules of origin carry significant compliance costs. More fundamentally, it is becoming increasingly clear that they are often been designed to force developing economies to buy inefficient intermediate products from developed economies to "pay for" preferential access for the final product. The evidence also suggests that a significant share of the rents associated with market access (net of rules of origin compliance costs) is captured by developed economies. Finally, the restrictiveness of rules of origin is found to be beyond the levels that would be justified to prevent trade deflection, suggesting a capture by special interest groups. The article outlines some alternative paths to reforms. Copyright The Author 2007. Published by Oxford University Press on behalf of the International Bank for Reconstruction and Development / the world bank . All rights reserved. For permissions, please e-mail: journals.permissions@oxfordjournals.org, Oxford University Press.

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Article provided by World Bank Group in its journal The World Bank Research Observer.

Volume (Year): 23 (2007)
Issue (Month): 1 (October)
Pages: 77-105

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Handle: RePEc:oup:wbrobs:v:23:y:2007:i:1:p:77-105
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  1. Anson, José & Cadot, Olivier & de Melo, Jaime & Estevadeordal, Antoni & Suwa Eisenmann, Akiko & Tumurchudur, Bolormaa, 2003. "Rules of Origin in North-South Preferential Trading Arrangements with an Application to NAFTA," CEPR Discussion Papers 4166, C.E.P.R. Discussion Papers.
  2. 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.
  3. Avinash K. Dixit & Gene M. Grossman, 1981. "Trade and Protection with Multistage Production," NBER Working Papers 0794, National Bureau of Economic Research, Inc.
  4. �aglar Özden & Gunjan Sharma, 2006. "Price Effects of Preferential Market Access: Caribbean Basin Initiative and the Apparel Sector," World Bank Economic Review, World Bank Group, vol. 20(2), pages 241-259.
  5. Ozden, Caglar & Sharma, Gunjan, 2004. "Price effects of preferential market access : the Caribbean Basin Initiative and the apparel sector," Policy Research Working Paper Series 3244, The World Bank.
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