Box 1. An overview of rules of origin in regional trading agreements (RTAs) European Union
The impact of rules of origin on trade flows
Article first published online: 25 JUL 2005
Volume 20, Issue 43, pages 567–624, July 2005
How to Cite
Augier, P., Gasiorek, M. and Lai Tong, C. (2005), The impact of rules of origin on trade flows. Economic Policy, 20: 567–624. doi: 10.1111/j.1468-0327.2005.00146.x
The EU has in recent years tried to move towards a common set of ROOs across each of its preferential trading arrangements. That common set of rules is known as the Pan-European system and was introduced in 1997. In practice (minor) differences across the EU's regional arrangements still remain depending on when the original agreements were signed. Hence, for example, the ROOs applicable to the Association Agreements with Egypt and Jordan are virtually identical to the Pan-European rules, whereas the agreements with Morocco and Tunisia are slightly different for certain product categories. The EU ROOs use all of the above criteria depending on the product being considered with the change of tariff classification and the minimum value being most frequently used. Anson et al. (2004) show that in the Pan-EU system the change of tariff classification rule applies to 33% of products listed, the value added rule applies to 11% of products, 13% of products are covered by both of these criteria, and 18% of products by the combination of either of these with the specific production processes rule.
United States and the Americas
In the Western Hemisphere, there is generally more variation in the usage of the different criteria than in Europe. The rules in the NAFTA agreement (and then also in many other related agreements such as US–Chile, Mexico–Bolivia, Chile–Canada etc.) are complex, requiring either a change of tariff chapter, heading, or item depending on the product, and these are often combined with one of the other criteria. In contrast in the Latin American Integration Agreement there is a general rule involving a change in tariff classification or a regional value added of at least 50% of the f.o.b. (free on board) value of exports. Similar rules apply in CARICOM and in the Andean Community. Where the EU is attempting to harmonize its ROO regimes across different agreements, this is not the case for the US, where the regimes vary widely between different agreements.
The use of simpler rules is often the case in many other regional integration schemes. Some only use the change in tariff classification rule, e.g. Canada–Israel, or CACM. Others focus primarily on the minimum value-content rule (e.g. ANZCERTA, SPARTECA, ECOWAS, COMESA, MERCOSUR) which can range widely. Hence this can vary from, for example, 25% domestic content in the Namibia–Zimbabwe FTA, to 35% in COMESA, to 60% domestic content for MERCOSUR. Other regimes, however, do introduce more sectoral selectivity such as SADC, or the Japan–Singapore Economic Partnership Agreement.
- Issue published online: 25 JUL 2005
- Article first published online: 25 JUL 2005
Rules of origin
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. Rules of origin have long been ignored for two good reasons: they are dauntingly complex and at first sight appear mind-numbingly dull. The third standard reason for ignoring them – the assertion that they do not matter much – turns out to be wrong. We show 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.
Our empirical results exploit a ‘natural experiment’ that was created by technical changes to Europe's lattice of rules of origin (ROOs) in 1997. This change, known as ‘diagonal cumulation’, relaxed the restrictiveness of rules of origin on trade among the EU's free trade agreement (FTA) partners without changing the degree of tariff preference. Our analysis allows us to establish a lower-bound and upper-bound estimate of trade impact of ROOs reduced trade among the EU's trade partners. The lower bound we find is something like 10% while the upper bound is around 70%. The second part of the paper draws the policy lessons that arise from considering the implications of our empirical findings. The most direct lessons are for FTA-writers. We argue that Europe's implementation of ‘cumulation’ is a good way of reducing the welfare-reducing impact of overlapping rules of origin without gutting their fraud-fighting ability. We also suggest a three-part procedure for establishing a more multilateral framework for rules of origin which would be more transparent, flexible, administratively feasible and negotiable.
— Patricia Augier, Michael Gasiorek and Charles Lai-Tong