From final goods to inputs: the protectionist effect of rules of origin

Abstract

Recent decades have witnessed a surge of trade in intermediate goods and a proliferation of free trade agreements (FTAs). FTAs use rules of origin (RoO) to distinguish goods originating from member countries from those originating from third countries. In this paper, we show that the sourcing restrictions embedded in RoO greatly distort trade in intermediaries. We focus on the North American Free Trade Agreement (NAFTA), the world's largest FTA, and construct a unique dataset that allows us to map the input-output linkages in its RoO. Using a difference-in-differences approach, we find that RoO on final goods reduced imports of intermediate goods from third countries by around 30 percentage points. Even if external tariffs are unchanged, FTAs may thus violate multilateral trade rules, by substantially increasing the level of protection faced by non-members.