Heterogeneous Trade Agreements and Adverse Implications of Restrictive Rules of Origin: Evidence From Apparel Trade

We revisit the heterogeneous effects of regional trade agreements (RTAs) using a PPML gravity model and comparing apparel and total trade. Apparel, as a politically sensitive sector, has specialized, unusually restrictive rules of origin (RoOs) clauses that vary considerably across RTAs. Our RTA estimates have a significantly higher variance for apparel trade than total trade. We also find that the sizes of the RTA estimates for apparel trade are significantly and negatively correlated with the restrictiveness of RoOs. Additionally, assessing temporary exceptions to the apparel RoOs in US trade agreements, we find that ending the temporary exceptions is associated with less apparel trade. We further illustrate how RTAs can be effective development policy instruments to promote economic development in developing countries. For example, updating the RoOs in the Dominican Republic-Central America Free Trade Agreement can create jobs and significantly reduce Central American emigration.