A (more) systematic exploration of the trade effect of product-specific rules of origin

Abstract

Rules of Origin (RoO) are critical components of Preferential Trade Agreements (PTAs). They are designed to stop products coming into a PTA through the partner that applies the lowest tariff – a phenomenon known as trade deflection. While RoO are necessary, complex RoO may undo the benefits of trade agreements. Using a novel database of RoO, this paper evaluates the incidence and restrictiveness of different types of Product-Specific Rules of Origin (PSRs) across 128 reciprocal PTAs for the period 1990 - 2015. Results, based on a structural gravity model controlling for confounding factors, display wide heterogeneity across different categories of PSRs attached to preferential margins, with more flexible PSRs associated with a significantly stronger trade effect compared to more restrictive ones where exporters do not have a choice among PSRs or have to satisfy multiple PSRs. A simulation exercise reveals that a radical simplification reform leading to the adoption of flexible PSRs providing alternative choices to prove origin would have increased global trade under PTAs on average by between 2.7 and 4 percent during the sample period.