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Rules of origin and the profitability of trade deflection

Author

Listed:
  • Felbermayr, Gabriel
  • Teti, Feodora
  • Yalcin, Erdal

Abstract

When a country grants preferential tariffs to another, either reciprocally in a free trade agreement (FTA) or unilaterally, rules of origin (Roos) are defined to determine whether a product is eligible for preferential treatment. RoOs exist to avoid that exports from third countries enter through the member with the lowest tariff (trade deflection). However, RoOs distort exporters' sourcing decisions and burden them with red tape. Using a global data set, we show that, for 86% of all bilateral product-level comparisons within FTAs, trade deflection is not profitable because external tariffs are rather similar and transportation costs are non-negligible;in the case of unilateral trade preferences extended by rich countries to poor ones that ratio is a striking 98%. The pervasive and unconditional use of RoOs is, therefore, hard to rationalize. (C) 2019 Published by Elsevier B.V.

Suggested Citation

  • Felbermayr, Gabriel & Teti, Feodora & Yalcin, Erdal, 2019. "Rules of origin and the profitability of trade deflection," Munich Reprints in Economics 78266, University of Munich, Department of Economics.
    • Handle: RePEc:lmu:muenar:78266
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    JEL classification:

    • F10 - International Economics - - Trade - - - General
    • F13 - International Economics - - Trade - - - Trade Policy; International Trade Organizations
    • F15 - International Economics - - Trade - - - Economic Integration

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