Determinants and impacts of rules of origin in Australia’s free trade agreements.

This thesis investigates the determination of the rates of utilisation of Australian free trade agreements (FTAs). The topic is important and interesting because the utilisation rates show the usage of the agreements by traders. Low utilisation rates imply that trade agreements fail in their objective. Following a review of relevant literature, the study presents data on the utilisation rates of Australia’s preferential trade agreements (PTAs) over the time frame of 2000-9. This work requires some care in the definition of the utilisation rate, a matter which is discussed in detail in the presentation of this part of the empirical work. It is found that utilisation rates vary a lot. The variations appear to be related to low preferential tariff margins and the degree to which there are strict rules of origin (ROO). These rules are associated with FTAs to manage the problem of trade deflection (TD). The ROO schemes of five Australian FTAs are investigated and a ROO restrictiveness index is developed and applied to these five Australian trade agreements. The main findings are that all five ROO regimes differ significantly between the agreements, indicating that ROO are negotiated according to criteria beyond their role in managing TD. A question of interest therefore arises about the set of important determinants of ROO. One hypothesis in the literature is that more restrictive ROO are negotiated in tariff lines with relatively high preferential margins. To examine and test this hypothesis in detail, a political economy (PE) model is applied. PE and TD factors are taken into account in a test of the relative importance of these different factors. The results confirm that TD concerns in form of potential transshipment are reflected by ROO design; however this is the case only for the Australian agreements with its developing country partners. The results also show that more restrictive ROO are negotiated in tariff lines with high applied tariff rates and for commodities where a potential import penetration may occur. The higher the potential competition in the form of trade penetration and the higher market access in the form of low preferential tariff rats, the more restrictive are the negotiated ROO. Therefore, these results suggest that ROO are used as both a trade protection and as a tariff substitution tool. The research then returns to the question of the impact of ROO on the utilisation rates and trade development in Australia’s FTAs. An equation is estimated in which the relationship and impact of ROO and preferential tariff margins on the utilisation rates is tested. To avoid endogeneity between tariff rates and ROO as identified in this thesis, the study employs the instrumental variable method by using the results of the determinants of ROO as an instrument. Two main hypotheses are examined, namely (1) do more restrictive ROO increase trade costs and with that lower the application of preferential treatment in form of utilisation rates, and (2) do preferential tariff margins serve as an incentive to apply for preferential treatment. The results show a strong negative relationship between the degree of restrictiveness of ROO and the utilisation rates and a positive relationship between preferential tariff margins, and utilisation rates.Thesis (Ph.D.) -- University of Adelaide, School of Economics, 201