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Why OECD Countries should Reform Rules of Origin

Author

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  • Cadot, Olivier
  • de Melo, Jaime

Abstract

With preferential trading Agreements (PTAs) on the rise worldwide with multiple memberships, rules of origin-- which are necessary to prevent trade deflection --are attracting increasing attention. At the same time, preference erosion for GSP recipients is threatening the viability of the further multilateral negotiations. Drawing on different approaches, we show that the current system of rules of origin (RoO) in place for EU and US preferential trade agreements (including the GSP) which are representative of RoO practiced by OECD countries should be drastically simplified if developed countries really want to help developing countries integrate into the World Trading System. Besides diverting resources for administration, RoO regimes of the EU and US carry significant compliance costs. More fundamentally, it is becoming increasingly clear that RoO have often been designed to force the Southern partner to buy inefficient intermediate products from the Northern partner (the so-called ‘double transformation rule’ in textiles & apparel (T&A) is such an example) to ‘pay for’ preferential access for the final product. Evidence is also indicating that a significant fraction of the remaining rents (after accounting for increasing costs to comply with RoO requirements) associated with market access are largely captured by the Northern partner. Finally, we report evidence that the restrictiveness of RoO is beyond levels that would be justified to prevent trade deflection implying capture by special interest groups. The paper concludes by outlining alternative paths to reforms.

Suggested Citation

  • Cadot, Olivier & de Melo, Jaime, 2007. "Why OECD Countries should Reform Rules of Origin," CEPR Discussion Papers 6172, C.E.P.R. Discussion Papers.
  • Handle: RePEc:cpr:ceprdp:6172
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    References listed on IDEAS

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    1. José Anson & Olivier Cadot & Antoni Estevadeordal & Jaime de Melo & Akiko Suwa-Eisenmann & Bolormaa Tumurchudur, 2005. "Rules of Origin in North-South Preferential Trading Arrangements with an Application to NAFTA," Review of International Economics, Wiley Blackwell, vol. 13(3), pages 501-517, August.
    2. 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.
    3. Çaglar 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.
    4. 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.
    5. Avinash K. Dixit & Gene M. Grossman, 1982. "Trade and Protection with Multistage Production," Review of Economic Studies, Oxford University Press, vol. 49(4), pages 583-594.
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    Cited by:

    1. Kazunobu Hayakawa & Tadashi Ito & Fukunari Kimura, 2016. "Trade Creation Effects of Regional Trade Agreements: Tariff Reduction versus Non-tariff Barrier Removal," Review of Development Economics, Wiley Blackwell, vol. 20(1), pages 317-326, February.
    2. Hayakawa, Kazunobu, 2013. "Does the use of multiple FTAs force firms to raise local input share?: Evidence of the spaghetti bowl phenomenon," Economic Modelling, Elsevier, vol. 33(C), pages 458-461.
    3. Paul Collier & Anthony J. Venables, 2007. "Rethinking Trade Preferences: How Africa Can Diversify its Exports," The World Economy, Wiley Blackwell, vol. 30(8), pages 1326-1345, August.
    4. repec:idb:idbbks:262 is not listed on IDEAS
    5. Hayakawa, Kazunobu, 2011. "Measuring fixed costs for firms’ use of a free trade agreement: Threshold regression approach," Economics Letters, Elsevier, vol. 113(3), pages 301-303.
    6. Patrick Georges, 2010. "Dispensing with NAFTA Rules of Origin? Some Policy Options," The World Economy, Wiley Blackwell, vol. 33(11), pages 1606-1637, November.
    7. Kazunobu Hayakawa & Nuttawut Laksanapanyakul & Shujiro Urata, 2016. "Measuring the costs of FTA utilization: evidence from transaction-level import data of Thailand," Review of World Economics (Weltwirtschaftliches Archiv), Springer;Institut für Weltwirtschaft (Kiel Institute for the World Economy), vol. 152(3), pages 559-575, August.
    8. Antoni Estevadeordal & Kati Suominen & Jeremy Harris & José Ernesto López Córdova, 2008. "Gatekeepers of Global Commerce: Rules of Origin and International Economic Integration," IDB Publications (Books), Inter-American Development Bank, number 16558, February.
    9. Rita Cappariello, 2017. "Brexit: estimating tariff costs for EU countries in a new trade regime with the UK," Questioni di Economia e Finanza (Occasional Papers) 381, Bank of Italy, Economic Research and International Relations Area.
    10. Hayakawa, Kazunobu & Nuttawut, Laksanapanyakul & Yoshimi, Taiyo, 2018. "Tariff scheme choice," IDE Discussion Papers 684, Institute of Developing Economies, Japan External Trade Organization(JETRO).
    11. Hayakawa, Kazunobu, 2014. "Impact of diagonal cumulation rule on FTA utilization: Evidence from bilateral and multilateral FTAs between Japan and Thailand," Journal of the Japanese and International Economies, Elsevier, vol. 32(C), pages 1-16.

    More about this item

    Keywords

    market access; AFTA; ASEAN; NAFTA; PANEURO; preferential trade agreements; Rules of Origin;

    JEL classification:

    • F13 - International Economics - - Trade - - - Trade Policy; International Trade Organizations
    • F15 - International Economics - - Trade - - - Economic Integration

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