Empirical assessment of the impact on trade of product specific preferential rules of origin

This thesis addresses the issue of rules of origin and their impact on trade flows. Four objectives are sought: i) to provide further evidence on the impact on trade of product-specific preferential rules of origin; ii) to develop a restrictiveness index based on empirical findings; iii) to open the path for the impact of the rules of origin on particular sectors other than textiles; and iv) to contribute with further evidence on regime-wide provisions. Literature on rules of origin is reviewed in Chapter 2. While theoretical literature establishes certain conditions under which rules of origin can increase welfare, empirical literature is unanimous about the negative effects they have on trade flows. Two main aspects stem from the review of the empirical literature. First, empirical literature on rules of origin remains still very limited in scope. Second, in order to proxy the stringency of the rules, traditional literature relies on restrictiveness indices based on an ex-ante observation rule. This rule depends on the authors’ appreciation, which can potentially be incorrect. Chapter 3 provides a broad explanation about the different type of product specific and regime-wide rules of origin. The framework to assess the impact of specific rules and regime-wide provisions on trade flows is developed in Chapter 4. The analysis is conducted using a gravity model of disaggregated panel data for four reporting countries and 16 FTA partners, controlling for reporter and partner fixed effects. In order to account for different ways of modeling specific rules of origin, four different methods are confronted. Data sources and explanations are also provided in this Chapter. Each of the methods is estimated for total trade flows, exports and imports, as a way to improve the validity of the estimates. The results, along some issues regarding the proper form of the specification are presented in Chapter 5. The results prove significant for every specification and suggest that regional value content type of rules, as well as self-certification procedures promote trade within the FTAs. Using the estimates from the previous chapter, an ex-post restrictiveness index is constructed in Chapter 6. This index is subsequently used to assess the stringency of the rules of origin by sector and by agreement stringency levels. One of the main differences of this index with past indices is the relatively high level of leniency it assigns to regional value content rules. The validity of the ex-post index is checked by estimating the impact of rules of origin on North-South trade as well as on agricultural, industrial and textile imports, finding support on the results. After analyzing the state of play of rules of origin in today’s world, policy recommendations are provided in Chapter 7. There is a practical unanimity on the need to reform the rules of origin as they currently stand. The possibility to choose across-the-board between a regional value content rule and current rules, coupled with self-certification procedures appears to address the concerns of researchers, industry and policy makers.EThOS - Electronic Theses Online ServiceGBUnited Kingdo