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Assessing the impact of political economy factors on rules of origin under NAFTA

  • Portugal-Perez, Alberto

Rules of origin are legitimate policy instruments to prevent trade deflection in a preferential trade agreement short of a customs union. Trade deflection takes place when a product imported into the preferential trade agreement through the member with the lowest external tariff is transhipped to a higher-tariff member, while yielding a benefit for the re-exporter. Yet, when captured by special interest groups, rules of origin can restrict trade beyond what is needed to prevent trade deflection. By how much do political economy factors account for the stringency of rules of origin? This study quantifies the impact of both determinants - those considered"justifiable"because they prevent trade deflection and those deemed to arise from"political economy"forces - on the restrictiveness of rules of origin under the North American Free Trade Agreement, approximated by a restrictiveness index. The main finding is that political economy forces, especially from the United States, raised significantly the restrictiveness of the rules of origin. Indeed, in industries where political-economy forces were strong prior to the North American Free Trade Agreement, as when the U.S. Most Favored Nation tariff was high or the revealed comparative advantage of Mexico (the United States) was strong (weak), more stringent rules of origin were introduced. Thus, stricter rules of origin are associated with higher production costs reducing the potential benefits of enhanced market access that is initially pursued by this type of agreement.

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Paper provided by The World Bank in its series Policy Research Working Paper Series with number 4848.

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Date of creation: 01 Feb 2009
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Handle: RePEc:wbk:wbrwps:4848
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  1. Olivier Cadot & Antoni Estevadeordal & Akiko Suwa-Eisenmann, 2004. "Rules of origin as export subsidies," Research Unit Working Papers 0405, Laboratoire d'Economie Appliquee, INRA.
  2. Cadot, Olivier & Estevadeordal, Antoni & Suwa-Eisenmann, Akiko & Verdier, Thierry (ed.), 2006. "The Origin of Goods: Rules of Origin in Regional Trade Agreements," OUP Catalogue, Oxford University Press, number 9780199290482, March.
  3. 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, 08.
  4. Marcelo Olarreaga & Çaglar Özden, 2005. "AGOA and Apparel: Who Captures the Tariff Rent in the Presence of Preferential Market Access?," The World Economy, Wiley Blackwell, vol. 28(1), pages 63-77, 01.
  5. Demidova, Svetlana & Kee, Hiau Looi & Krishna, Kala, 2012. "Do trade policy differences induce sorting? Theory and evidence from Bangladeshi apparel exporters," Journal of International Economics, Elsevier, vol. 87(2), pages 247-261.
  6. Carsten Kowalczyk & Raymond Riezman, 2009. "Trade Agreements," CESifo Working Paper Series 2660, CESifo Group Munich.
  7. Jason ABREVAYA & Jerry A. HAUSMAN, 1999. "Semiparametric Estimation with Mismeasured Dependent Variables: An Application to Duration Models for Unemployment Spells," Annales d'Economie et de Statistique, ENSAE, issue 55-56, pages 243-275.
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