The impact of rules of origin on trade flows

• Published in: Economic policy 2005-07, Vol.20 (43), p.567-624
• Main Authors: Augier, Patricia, Gasiorek, Michael, Lai Tong, Charles
• Format: Article
• Language: English
• Subjects: Economic theory; Impact analysis; Regionalism; Rule of origin; Studies; Tariffs; Trade agreements; Trade barriers; Trade policy
• ISSN: 0266-4658; 1468-0327
• DOI: 10.1111/j.1468-0327.2005.00146.x

A great deal of post-war trade liberalization resulted from regional, preferential trade agreements. Preferential trade agreements cut tariffs on goods originating only in those nations that have signed the agreement. Therefore, they need 'rules of origin' to determine which goods benefit from the tariff cut. This paper shows that rules of origin are important barriers to trade. Moreover, such rules are emerging as an important trade issue for three additional reasons. First, preferential trade deals are proliferating worldwide. Second, the global fragmentation of production implies complex international supply chains which are particularly constrained and distorted by rules of origin. Third, the extent to which regionalism challenges the WTO-based trading system depends in part on incompatibilities and rigidities built into rules of origin. Empirical results exploit a 'natural experiment' that was created by technical changes to Europe's lattice of rules of origin (ROOs) in 1997. The analysis establishes a lower-bound and upper-bound estimate of trade impact of ROOs reduced trade among the EU's trade partners. The paper draws the policy lessons that arise from considering the implications of the empirical findings. It also suggests a three-part procedure for establishing a more multilateral framework for rules of origin which would be more transparent, flexible, administratively feasible and negotiable.