ANTONI ESTEVADEORDAL
KATI SUOMINEN
Rules of Origin in Preferential
Trading Arrangements: Is All Well with
the Spaghetti Bowl in the Americas?
referential trading arrangements (PTAs) have proliferated spectacularly over the past decade around the world.1 The number of
PTAs in force soared from fifty in 1990 to some 230 by the end of
2004, and it is expected to rise to 300 in the course of 2005. Governing
more than a third of global trade, PTAs have sparked intense policy interest at the multilateral level. They are among the top priorities of the ongoing Doha Round of trade negotiations of the World Trade Organization
(WTO).2
The Western Hemisphere has been a major source for the expansion of
the world’s PTAs. The region’s countries have signed some forty free
trade agreements with each other or with extrahemispheric parties since
1990. Mexico and Chile have been particularly prolific integrators: Mexico
has signed twelve PTAs and Chile seven.3 While the bulk of their agreements are with partners in the Americas, both countries have also integrated with European and Asian economies. For its part, the United States
has concluded four free trade agreements in the Americas and six with
P
Estevadeordal and Suominen are with the Inter-American Development Bank’s Integration
and Regional Programs Department, Integration, Trade, and Hemispheric Issues Division.
We are grateful to Andrés Rodríguez, Pablo Sanguinetti, Alberto Trejos, and Andrés
Velasco for outstanding comments.
1. PTAs include free trade agreements, customs unions, common markets, and single
markets.
2. The Doha Declaration states, “We also agree to negotiations aimed at clarifying and
improving disciplines and procedures under the existing WTO provisions applying to
regional trade agreements. The negotiations shall take into account the developmental
aspects of regional trade agreements.”
3. The figures refer to formal free trade agreements and exclude the economic complementation agreements.
63
64 E C O N O M I A , Spring 2005
nonhemispheric partners, and it is proceeding toward another six. In total,
the countries of the Americas are negotiating or opening negotiations for
more than two dozen new PTAs. Prominent ongoing initiatives include
the Free Trade Area of the Americas (FTAA) talks encompassing thirtyfour countries and the negations between the Southern Common Market
(Mercosur) and the European Union aimed at connecting the world’s two
largest customs unions.
The hemispheric PTA spree has forged a veritable spaghetti bowl of
multiple and often overlapping agreements (figure 1). The various rules
included in each PTA—such as standards, safeguards, government procurement, and investment—entangle the bowl further. While PTAs can
generate important economic benefits, the PTA spaghetti bowl carries two
risks. First, the manifold trade rules of PTAs can introduce policy frictions
that increase the costs of trading. Each new rule in each PTA represents a
new policy for firms to consider in their export, outsourcing, and investment decisions. Each also has legal, administrative, and economic implications for the PTA partner countries. Not all PTA rules necessarily work to
expand trade from its pre-PTA levels. Second, differences in rules across
PTAs can translate into transaction costs to countries dealing on two or more
F I G U R E 1 . The Americas and Trans-Pacific PTA Spaghetti Bowl
Hong Kong
EU, EFTA
FTAA
APEC
PR China
Brunei
Taiwan
Cambodia
Canada
Costa CACM
Rica El Salvador
Guatemala
Honduras
Nicaragua
Korea
Thailand
Malaysia
Philippines
Japan
USA
Panama
Mercosur
Paraguay
Argentina Brazil
Uruguay
Mexico
Myanmar
Bolivia
ASEAN
Singapore
New Zealand
Laos
Indonesia
Vietnam
Chile
Ecuador
Andean
Peru Community
Australia
Papua New Guinea
FTAA
APEC
Intra-Americas in force
Intra-Asia-Pacific in force
Intra-Asia-Pacific signed
Trans-Pacific signed
Colombia
Venezuela
Russia
Source:–Devlin and Estevadeordal (2004).
Bahamas
Dominican
Republic
CARICOM
Dominica Trinidad & Tobago
Suriname Grenada Barbados
Jamaica St. Vincent & Grenadines
Guyana Antigua & Barbuda
St. Kitts & Nevis Belize
Haiti St. Lucia
Antoni Estevadeordal and Kati Suominen
65
PTA fronts simultaneously. This is a particular consideration in the Americas, where each country belongs to an average of four PTAs.4
Rules of origin are a key market access rule (or discipline, in the jargon
of trade negotiators) in PTAs. Rules of origin are the crucial gatekeepers
of commerce: a product shipped from an exporting PTA member must
meet the corresponding rule of origin to receive preferential treatment
from the importing member. Rules of origin epitomize the hemisphere’s
policy problem: a growing number of the region’s PTAs carry complex
and restrictive rules of origin, and the many rules-of-origin regimes differ from each other. Consequently, the rules-of-origin spaghetti could
hold back the trade-creating potential of the hard-earned PTAs.
This paper presents an in-depth diagnosis of rules-of-origin regimes in
the Americas and offers policy recommendations for the region to
counter the potential negative effects of rules of origin. We hope to make
two contributions: to deepen understanding of the types and effects
of rules of origin used in Western Hemisphere PTAs, and to add rigor to
the policy debate on the implications of PTAs to the multilateral trading
system.5
The paper is organized in four parts. The first part surveys the state and
latest trends in the rules-of-origin regimes in the Americas. The next section summarizes the recent research on the political economy reasons
behind the choice of rules-of-origin instrument in PTAs. The third section
does the same for the economic effects of rules of origin, and discusses the
implications of the research findings to the hemisphere’s PTA spaghetti
bowl. The fourth part contains our policy recommendations, and a final
section concludes.
The Current Status of Rules-of-Origin Regimes in the Americas
Rules of origin can be divided into nonpreferential and preferential rules of
origin. Individual countries use nonpreferential rules of origin to distinguish
foreign from domestic products when applying other trade policy instruments,
4. The calculation includes continental Latin America, Canada, and the United States,
but not the countries of the Caribbean. The figures exclude partial scope agreements and
economic complementation agreements.
5. See Estevadeordal and Suominen (2005a), Suominen (2004), and WTO (2002b) for
further discussions on rules-of-origin regimes around the world.
66 E C O N O M I A , Spring 2005
such as antidumping and countervailing duties, safeguard measures, origin marking requirements, discriminatory quantitative restrictions or tariff quotas, and rules on government procurement. The WTO is in the final
stages of the decade-long process of harmonizing nonpreferential rules of
origin at the multilateral level.6 Preferential rules of origin, the focus of
this paper, are employed in PTAs and in the context of a generalized system
of preferences. They define the processes to be performed and inputs to be
incorporated in a product in the territory of an exporting PTA member
in order for the product to qualify for preferential access to an importing PTA member. The justification for preferential rules of origin is to
curb trade deflection—to prevent products originating from non-PTA
members from being transshipped through a low-tariff PTA partner to a
high-tariff one under the PTA-provided preferential treatment. Rules of
origin, in short, are tools for keeping non-PTA parties from free riding on
the PTA preferences. They are an inherent feature of free trade agreements in which the members’ external tariffs diverge or in which the
members wish to retain their individual tariff policies vis-à-vis the rest of
the world. Rules of origin are also used in aspiring customs unions to govern sectors for which the members have yet to establish a common external tariff.7
Rules of origin have become increasingly important over the past decade.
This is due both to the globalization of production—the growth of international trade in goods manufactured in multiple countries—and to the
fact that today’s PTAs quickly reduce the preferential tariff, the more traditional tool regulating preferential market access, to zero across most
product categories. Indeed, rules of origin are currently a key arbitrator of
the effectiveness of multilateral trade rules requiring PTAs to cover “substantially all trade” between the partner countries and not to raise barriers
vis-à-vis third parties.
Preferential rules of origin have thus far eluded multilateral regulation.
As a result, a wide repertoire of rules-of-origin types and combinations
has developed around the world. This section surveys the rules of origin
employed in the Western Hemisphere’s PTAs.
6. See Estevadeordal and Suominen (2005a) and Suominen (2004) for details on the
harmonization process.
7. Rules of origin are thus employed in the vast majority of PTAs. The Asia-Pacific
Economic Cooperation (APEC) forum is a prominent exception in that it operates on the
concept of open regionalism, with the preferential tariffs essentially being extended also to
nonmembers.
Antoni Estevadeordal and Kati Suominen
67
Product-Specific Rules of Origin:Toward Product-Specific Tailoring
Preferential rules of origin were a simple affair in most of the world until a
few years ago.8 In the Americas, trade agreements formed before the 1990s
generally put in place one, often vaguely defined, rule of origin applicable
to all products. Over time, the lack of precision in origin requirements
became much criticized for allowing—and indeed requiring—subjective
case-by-case origin determinations.9 The growth in international trade and
the globalization of production expanded the constituency that paid attention to rules of origin, while paradoxically complicating correct judgments
on origin.
Perhaps the single most important event that raised the profile of rules of
origin in the Americas was the U.S. Customs finding in 1991 that the domestic content in Honda Civics imported from Canada fell below 50 percent—
the threshold required for claiming origin under the U.S.-Canada free trade
agreement of 1989 and the preceding U.S.-Canada Auto Pact of 1965. The
finding fuelled the U.S. automotive industry’s concerns about the intensifying Japanese competition and the moves by Japanese companies to use
Canada as a production base. For its part, Canada, which was concerned
about the loss of foreign investment, claimed that U.S. origin determinations were arbitrary at best. The Honda case had important repercussions
for the 1994 North American Free Trade Agreement (NAFTA) negotiations. Pressured by vehicle lobbies, NAFTA negotiators put in place a
highly precise regional value content of 62.5 percent—a level that Japanese
firms were not expected to meet. The rules of origin lobbying spread
through other economic sectors. Fearing that Asian and European firms
would establish simple touch-up assembly operations in Mexico in order
to gain duty-free access to the North American markets, U.S. industries
called for tailor-made rules of origin that would be stringent enough to
keep extraregional parties out, yet lenient enough to allow U.S. multinationals to retain their extraregional outsourcing linkages. Mexico, in
turn, generally pushed for rules of origin that would not deter foreign
investment. This bargaining resulted in the 150-page NAFTA rules-oforigin protocol, which carries individualized rules of origin for some
5,000 different products.
8. The exception to the global pattern of general and vaguely defined rules of origin was
the European Community, which as early as the 1970s had preferential rules-of-origin
regimes with different rules of origin governing the various product categories.
9. Reyna (1995, p. 7).
68 E C O N O M I A , Spring 2005
Product-by-product rules-of-origin tailoring became the norm in PTA
talks across the hemisphere and around the world. The drive toward precise rules of origin was reflected by the 1999 multilateral Kyoto Convention, which established five main criteria for determining origin.10 The first
is the wholly obtained or produced criterion, which asks whether the commodities and related products have been entirely grown, harvested, or
extracted from the soil in the territory of the exporting PTA member or
manufactured in that member from any of these products. This rule is
met through not using any second-country components or materials. The
remaining four criteria are more complex and are packaged together under
the substantial transformation criterion. Of the four individual criteria, the
first involves a change in tariff classification in the territory of a PTA member between a product imported from an extra-PTA party and the product
that is being exported within the PTA. The change may be required to occur
at the level of chapter (two digits under the Harmonized Commodity
Description and Coding System), heading (four digits), subheading (six
digits), or item (eight to ten digits). The second criterion is an exception
attached to a change in tariff classification rule, which generally prohibits
the use of nonoriginating materials from a specific subheading, heading,
or chapter. The third defines the value content and prescribes either a minimum percentage of the product’s value that must originate in the territory
of the exporting PTA member (domestic or regional value content) or a
maximum percentage of the product’s value that can originate outside the
PTA member’s territory (import content). Finally, technical requirements
prescribe or prohibit the use of certain inputs or the realization of certain
processes in the production. Technical requirements are particularly prominent in rules of origin governing apparel products.
Rules-of-origin regimes use these four substantial transformation rules
both alone and in combination with each other. The staple of regimes is the
change in tariff classification. This rule is used at different levels: more than
half of NAFTA rules of origin are based on a change in chapter, while many
other regimes use mainly a change in heading. Table 1 displays the percentage shares of various combinations of rules-of-origin components in
selected PTAs in the Americas and elsewhere. The table reveals the high
10. The Revised Kyoto Convention is an international instrument adopted by the World
Customs Organization (WCO) to standardize and harmonize customs policies and procedures around the world. The WCO adopted the original Convention in 1974. The revised
version was adopted in June 1999.
Antoni Estevadeordal and Kati Suominen
69
T A B L E 1 . Distribution of Rules-of-Origin Combinations, Selected PTAs in the Americas
Requirementa
NC
NC + ECTC
NC + TECH
NC + ECTC + TECH
NC + VC
NC + ECTC + VC
NC + VC + TECH
NC + Wholly obtained
chapter
NC + Wholly obtained
heading
Subtotal
CI
CI + ECTC
CI + TECH
CI + ECTC + TECH
CI + VC
CI + ECTC + VC
CI + VC + TECH
Subtotal
CS
CS + ECTC
CS + TECH
CS + ECTC + TECH
CS + VC
CS + ECTC + VC
CS + VC + TECH
CS + ECTC + VC + TECH
Subtotal
CH
CH + ECTC
CH + TECH
CH + ECTC + TECH
CH + VC
CH + ECTC + VC
CH + VC + TECH
CH + ECTC + VC + TECH
Subtotal
NAFTA
U.S.Chile
G3
0.54
0.51
4.05
MercosurChile
Andean
Community
ChileKorea
U.S.Jordan
E.U.Mexico
E.U.Chile
0.39
2.04
1.39
0.39
2.39
1.39
83.94
10.91
1.57
0.20
11.90
1.57
0.20
16.06
7.62
7.62
0.70
0.70
0.51
0.02
100.00
0.54
0.78
0.53
4.05
0.00
100.00
1.29
100.00
24.82
26.16
0.04
0.00
0.00
0.00
0.00
0.00
0.00
0.00
0.00
1.29
2.52
0.04
0.40
16.56
5.57
0.14
0.04
0.42
0.04
1.54
0.73
0.10
0.04
4.60
0.20
0.20
1.90
1.78
0.27
0.27
2.37
2.25
32.99
5.13
32.86
4.56
6.66
12.68
0.86
6.66
12.78
0.37
0.02
0.02
58.34
57.25
0.02
0.02
0.10
1.68
0.47
2.11
0.16
0.04
0.83
4.35
22.77
7.88
0.00
17.09
19.18
0.02
0.14
3.54
0.58
0.10
23.70
11.19
0.34
0.44
3.25
0.48
16.45
13.45
0.97
0.26
2.01
46.00
40.65
39.40
0.00
9.99
23.97
46.02
100.00
0.00
46.87
9.12
0.14
20.04
8.06
4.82
4.42
2.95
0.49
0.00
59.57
0.00
(continued)
70 E C O N O M I A , Spring 2005
T A B L E 1 . Distribution of Rules-of-Origin Combinations, Selected PTAs
in the Americas (continued )
Requirementa
NAFTA
CC
CC + ECTC
CC + TECH
CC + ECTC + TECH
CC + VC
CC + ECTC + VC
CC + VC + TECH
CC + ECTC + VC + TECH
30.95
17.71
0.02
5.76
U.S.Chile
G3
23.18
5.83
0.06
8.08
0.06
21.09
5.90
5.43
6.65
0.14
MercosurChile
Andean
Community
ChileKorea
U.S.Jordan
22.49
4.71
0.08
5.67
1.80
E.U.Mexico
E.U.Chile
2.16
1.02
0.04
11.25
2.16
1.02
0.04
11.02
2.67
0.20
Subtotal
54.44
37.21
42.08
0.00
0.00
34.75
0.00
14.47
14.24
Total
100
100
100
100
100
100
100
100
100
Source: Adapted from Estevadeordal and Suominen (2005a); Suominen (2004).
a. The notation on requirements is as follows: NC: No change in tariff classification required; CI: Change in tariff item; CS: Change in
tariff subheading; CH: Change in tariff heading; CC: Change in tariff chapter; ECTC: Exception to change in tariff classification; VC: Value
content; and TECH: Technical requirement. Calculations are made at six-digit level of the Harmonized System.
degree of diversity in rules-of-origin regimes in the Americas. Nevertheless, four main hemispheric rules-of-origin families can be identified.11 One
extreme is populated by the older trade agreements such as the Latin American Integration Agreement (LAIA), which uses one general rule applicable
to all products (either a change of heading level or a 50 percent regional
value content). The LAIA model has been the point of reference for the
Andean Community and Caribbean Community rules-of-origin regimes.
At the other extreme lie the so-called new generation PTAs such as
NAFTA. The NAFTA model served as the reference point for numerous
recent bilateral agreements, including the U.S.–Central America free trade
agreement (CAFTA) and the U.S.-Chile, Chile-Canada, Mexico-Bolivia,
Mexico-Chile, Mexico–Costa Rica, Mexico-Nicaragua, Mexico–Northern
Triangle (El Salvador, Guatemala, and Honduras), and the Group of Three
(or G3, encompassing Mexico, Colombia, and Venezuela) free trade agreements. The model, particularly the versions employed in the U.S.-Chile
free trade agreement and CAFTA, is also widely viewed as the likeliest
blueprint for the FTAA rules of origin. The NAFTA-based rules-of-origin
regimes are complex: depending on the product, the rules of origin may
require a change of chapter, heading, subheading, or item, and the change
11. Garay and Cornejo (2002).
Antoni Estevadeordal and Kati Suominen
71
of tariff classification is often combined with an exception, regional value
content (generally ranging from 35 to 60 percent), or technical requirements. Like many other rules-of-origin regimes in the world, the NAFTAmodel regimes contain an alternative list of product-specific rules of origin
for selected products, which enables an exporter to choose between two
types of rules of origin. The list is relatively extensive in NAFTA, covering nearly 40 percent of the products, and its rules of origin are as complex
as those on the main list.
Mercosur rules of origin and the rules of origin in the Mercosur-Bolivia
and Mercosur-Chile free trade agreements are based on the change-ofheading criterion and different combinations of regional value content and
technical requirements. They fall between the LAIA and NAFTA extremes in
their degree of complexity. The Central American Common Market’s rulesof-origin regime can be placed between those of Mercosur and NAFTA.12
U.S. bilateral free trade agreements with some extrahemispheric
partners—such as Jordan and Israel—diverge markedly from the NAFTA
model, incorporating value content rules of origin alone. The rules of origin
of the U.S.-Singapore and U.S.-Australia free trade agreements, however,
resemble NAFTA in their complexity. The recently forged Chile–South
Korea and Mexico-Japan free trade agreements also feature sectoral selectivity à la NAFTA. The future Canada-Singapore, Mexico-Singapore, and
Mexico-Korea free trade agreements, among others, will likely compound
the spread of the NAFTA model in Asia and the Pacific. Meanwhile, the
European Union’s free trade agreements with Mexico and Chile carry the
European Union’s standard, harmonized pan-European rules of origin.13
How Restrictive Are Rules of Origin?
Making meaningful cross-product comparisons across the many types of
rules of origin requires a parsimonious tool. Estevadeordal’s restrictiveness index provides such a tool.14 The index’s observation rule is based on
12. The Central American Common Market chiefly uses a change in tariff classification
only. The regime is more precise and diverse than Mercosur, however, because it requires
the change to take place at the chapter, heading, or subheading level, depending on the product in question.
13. See Estevadeordal and Suominen (2003).
14. Estevadeordal (2000). The index was subsequently made more generalizable in
Estevadeordal and Suominen (2005a) and Suominen (2004). Carrerè and de Melo (2004)
compare Estevadeordal’s index with an ordering emerging from cost estimates of different
types of rules of origin; they find the index to be consistent with the cost ranking.
72 E C O N O M I A , Spring 2005
the length of the jump over the Harmonized System’s tariff lines required
by rules of origin: a change of chapter is more restrictive than a change of
heading, a change of heading more restrictive than a change of subheading, and so on. Value content and technical requirements add to the rule’s
restrictiveness.
Figure 2 reports the restrictiveness values of rules of origin in some of the
main PTAs. Since it is based on coding at the six-digit level, it also reveals
the degree of interproduct dispersion of restrictiveness values, which serves
as a measure of the selectivity of regimes. The final bar represents the likeF I G U R E 2 . Restrictiveness of Rules of Origin in Selected PTAsa
8
7
6
5
4
3
2
1
0
al
nti
ere
ref
np
No
TA
AF ile
h
.-C
E.U exico
.-M
E.U rope
u
n-E
Pa el
ra
-Is
US dan
r m.
-Jo
US n Com ia
v
a
de oli
An sur-B
rco hile
Me ur-C
s
rco
Me rea
-Ko
ile ivia
Ch -Bol ica
o
xic ta R
Me -Cos
o
xic
Me
G3
FTA
CA ile
h
.-C
U.S
FTA
NA
Source:–Adapted from Estevadeordal and Suominen (2005a); Suominen (2004).
a.–The box plots represent interquartile ranges (IQR), with the box extending from the twenty-fifth percentile to the seventy-fifth
percentile. The line in the middle of the box represents the median fiftieth percentile of the data. The whiskers emerging from the
boxes extend to the lower and upper adjacent values. The upper adjacent value is defined as the largest data point less than or equal to
x(75) + 1.5 IQR. The lower adjacent value is defined as the smallest data point greater than or equal to x(25) + 1.5 IQR. Observed points
more extreme than the adjacent values are individually plotted (outliers and extreme values are marked using—–and—–symbols,
respectively).
Antoni Estevadeordal and Kati Suominen
73
liest outcome of the harmonization process of nonpreferential rules of origin.
Two issues stand out. The first is the presence of rules-of-origin families.
Regimes drawing on the NAFTA model are highly similar in terms of overall restrictiveness and selectivity, as are regimes drawing on the Mercosur
and European Union models. Second, the NAFTA-type rules-of-origin
regimes are by far the most restrictive and selective in the hemisphere and,
indeed, the world. This finding is particularly important in light of the spread
of the NAFTA-model rules of origin across the hemisphere.
Research shows that food, textiles, and apparel products tend to have
the highest restrictiveness values across regimes.15 This provides precursory evidence that rules of origin may be arbitrated by the same political
economy variables that drive tariffs, particularly in the industrialized countries. Nonpreferential rules of origin feature some selectivity, which suggests the operation of political economy dynamics also at the multilateral
level—and the endogeneity of the nonpreferential rules of origin to the
existing preferential rules-of-origin regimes.
Comparing Regimewide Rules of Origin
Rules-of-origin regimes also vary in their use of general, regimewide rules
of origin—that is, rules of origin that apply similarly to all products in a
regime. Some of the most commonly used regimewide rules of origin include
the following:
—De minimis levels, which allow a specified maximum percentage of
nonoriginating materials to be used without affecting origin.
—Cumulation provisions, which enable producers of one PTA member
to use materials from other members without losing the preferential status
of the final product. The three types of cumulation are bilateral cumulation,
which operates between two PTA partners (that is, firms operating in one
partner country can use products that originate in the other and still qualify
for preferential treatment when exporting the product), diagonal cumulation, which allows countries tied by the same set of preferential origin rules
to use products that originate in any part of the common rules-of-origin
zone as if they originated in the exporting country, and full cumulation,
which extends diagonal cumulation to allow the use of goods processed in
any part of the common rules-of-origin zone even if these do not qualify as
originating products.
15. See, for example, Estevadeordal (2000); Estevadeordal and Suominen (2005a);
Suominen (2004); and Sanguinetti and Bianchi (2005).
74 E C O N O M I A , Spring 2005
—Prohibition of duty drawback, which precludes the refunding of tariffs on nonoriginating inputs that are subsequently included in a final product that is exported to a PTA partner. Drawback in the context of a PTA is
viewed as providing a cost advantage to producers who gear their final
goods to export over producers who sell their final goods in the domestic
market. However, ending drawback increases the cost of nonoriginating
components to producers who have thus far benefited from it.16
—Certification method, which defines the instance authorized to certify
an origin claim. The main methods are self-certification by exporters; certification by the exporting country’s government or a certifying agency; and a
two-step combination of the private self-certification and the public governmental certification. High bureaucratic hurdles for obtaining a certificate of
origin lower the incentives for exporters to seek preferential treatment.
Whereas de minimis and cumulation clauses insert leniency in the application of product-specific rules of origin, drawback prohibition and complex certification methods may have the opposite effect, namely, increasing
the difficulty of complying with the rules-of-origin regime.17
Table 2 compares the regimewide rules of origin in the various rulesof-origin regimes. Bilateral cumulation is applied in virtually all regimes,
but use of other regimewide components varies considerably. Again, the different rules-of-origin families stand out. The NAFTA-model regimes set de
minimis levels at 7–10 percent, preclude diagonal and full cumulation, do
not permit drawback (often after a certain transition period), and are based
on self-certification.18 There are exceptions; for example, CAFTA, the latest
of the NAFTA-model regimes, allows cumulation within Central America,
16. Many PTAs in the Americas include duty drawback provisions in the market access
chapter rather than in the rules-of-origin protocol. However, the implications of ending
drawback are very similar to the implications of stringent rules of origin, namely, increasing production costs for exporters. Cadot, de Melo, and Olarreaga (2001) show that duty
drawback may have a protectionist bias due to reducing producers’ interest in lobbying against
protection of intermediate products.
17. Nonmembers of a cumulation area may view the cumulation system as introducing
another layer of discrimination in that it provides incentives for member countries to outsource from within the cumulation zone at the expense of extrazone suppliers.
18. Two qualifications are in order. First, the de minimis principle has numerous exceptions in most regimes. For example, in NAFTA, it does not extend to dairy products, edible
products of animal origin, citrus fruit and juice, instant coffee, cocoa products, and some
machinery and mechanical appliances. Many regimes also calculate de minimis levels in
textile products as the percentage of weight rather than the value of the final product. Second,
although NAFTA prohibits drawback, it has launched a refund system, whereby the producer will be refunded the lesser of the amount of duties paid on imported goods and on the
exports of the good to another NAFTA member.
Yes
Yes
Yes
Yes
Yes
Yes
Yes
Not mentioned
Not mentioned
Yes
Yes
Yes
Yes
Yes
Not mentioned
Yes
Yes
Yes
10
Not mentioned
2
10
2c
Yes (except automotive)
Yes
Yes
7
7
7
8
9
Not mentioned
Not mentioned
10
Not mentioned
Not mentioned
10
10
10
7
10
10
Roll-up
Yes
Yes
Yes
Yes
Yes
Yes
Yes
Yes
Yes
Yes
Yes
Yes
Yes
Yes
Yes
Yes
Yes
Yes
Yes
Yes
Yes
Bilateral
Yes
Not mentioned
Not after 10 years
No
Yes
Yes (full in EEA)b
No
Yes (full)
No
No
Not mentioned
No after 7 years
No after 8 years
Not mentioned
Not mentioned
No after 5 years
No after 5 years
Yes
Not mentioned
Yes
Not mentioned
No after 2 years
No after 4 years
No after 7 years
No after 12 years
Not mentioned
Drawback
allowed?
No
No
Yes in chap. 62 with Mexico
and Canada
No
No
No
No
No
No
No
No
No
No
No (OP and ISI allowed)a
No
No
Diagonal
Cumulation
Source: Adapted from Estevadeordal and Suominen (2005a); Suominen (2004).
a. Both originating products (OP) and the integrated sourcing initiative (ISI) operate in the U.S.-Singapore Free Trade Agreement. ISI applies to nonsensitive, globalized sectors, such as information technologies. Under
the scheme, certain information technology components and medical devices are not subject to rules of origin when shipped from either of the parties to the FTA. The scheme is designed to reflect the economic
realities of globally distributed production linkages and to encourage U.S. multinationals to take advantage of ASEAN countries’ respective comparative advantages.
b. European Economic Area (EEA).
c. The section on trade remedies mentions that one of the criteria for imposing a countervailing duty within the block is that the targeted subsidy is not less than the 2 percent de minimis.
G3
Mexico–Costa Rica
Mexico-Bolivia
Chile-Korea
Canada-Chile
Mercosur-Chile
Mercosur-Bolivia
Central American Common Market (CACM)
U.S.-Jordan
U.S.-Israel
U.S.-Singapore
E.U.-Mexico
E.U.-Chile
Other regions
Pan-European
ASEAN Free Trade Agreement (AFTA),
Australia–New Zealand Closer Economic Relations Trade
Agreement (ANZCERTA)
Southern African Development Community (SADC)
Common Market for Eastern and Southern Africa (COMESA)
Americas
NAFTA
U.S.-Chile
CAFTA
Region and preferential trade agreement
De minimis
(percent)
T A B L E 2 . Regimewide Rules of Origin in Selected Preferential Trade Arrangements
76 E C O N O M I A , Spring 2005
Mexico, and Canada of materials that Central America may use for producing U.S.-bound goods.19 The clause covers only a limited quota, however, and it enters into force only after Canada and Mexico agree on it. The
Central American Common Market’s regimewide rules of origin resemble
those of the NAFTA model, but they do not prohibit drawback. Mercosur’s free trade agreements do not have de minimis levels or cumulation
provisions, they phase drawback out in five years, and they are based on
public certification.20 The European Union’s rules-of-origin regimes stand
out for employing diagonal cumulation extensively across Europe.21
As in the case of the restrictiveness of product-specific rules of origin,
the facilitation provided by regimewide rules of origin to the application
of the rules-of-origin regime can be systematically assessed through an
index. The facilitation index developed by Estevadeordal and Suominen
incorporates de minimis levels, diagonal cumulation, full cumulation, and
drawback (all of which can be expected to cut producers’ production costs
by amplifying their pool of low-cost inputs), as well as self-certification
(which can keep producers’ administrative costs lower than the other
methods).22 Figure 3 shows the behavior of the index. Regimes styled
after NAFTA and the European Union feature the highest levels of facilitation, while the Mercosur- and LAIA-based rules of origin score relatively low. The result suggests some correlation between the restrictiveness and facilitation indexes: regimes with the highest restrictiveness
of product-specific rules of origin tend to also have the highest facilitation values.
Many rules-of-origin regimes have devised further, more idiosyncratic
ad hoc mechanisms to help the members adjust to the rigors of rules of
origin.23 Some such mechanisms include phase-in periods for stringent
value content rules of origin; a number of different options for calculating value content rules of origin; and tariff preference levels, which allow
19. See chapter 62 of CAFTA. (The full text of CAFTA is available at www.sice.
oas.org/Trade/CAFTA/CAFTADR_e/CAFTADRin_e.asp.)
20. The Mercosur rules-of-origin regime is similar, but allows for drawback. Drawback
is, however, prohibited for Argentine and Brazilian imports of intermediate automotive
products when the final product is exported within Mercosur.
21. The absorption by the European Union customs union of the ten new member countries implied that thirty-four of the pan-European free trade agreements vanished overnight.
Prior to the accession, the diagonal cumulation incorporated sixteen partners and covered
no fewer than fifty free trade agreements.
22. Estevadeordal and Suominen (2005a); Suominen (2004).
23. For a more thorough treatment, see Estevadeordal and Suominen (2005a).
Antoni Estevadeordal and Kati Suominen
77
F I G U R E 3 . Facilitation of Regimewide Rules of Origin in Selected PTAs
4
3
2
1
0
NAFTA
U.S.Chile
CAFTA
G3
Mexico- Mexico- Chile- Merco- Merco- Andean U.S.- U.S.- Pan- E.U.- E.U.Costa Bolivia Korea sursur- Comm. Jordan Israel Europe Mexico Chile
Rica
Chile Bolivia
AFTA
Source:—Adapted from Estevadeordal and Suominen (2005a); Suominen (2004).
goods that would not otherwise satisfy the rules-of-origin protocol to
qualify for preferential treatment up to a yearly quota. While most regimes
that employ these mechanisms make them available to all members, some
regimes provide them to one or some of the PTA partners only (for instance
to accommodate country-specific endowments, production structures, and
development levels).
Trends in Rules of Origin in the Hemisphere
The main finding of the above analysis is that rules-of-origin regimes
based on the NAFTA model are among the most restrictive and selective
in the world. The analysis also reveals two key temporal trends in the
Western Hemisphere. First, the so-called new generation regimes of the
1990s score the highest for restrictiveness, selectivity, and facilitation values. Second, the restrictiveness of NAFTA-style agreements has fallen
somewhat over time. Some of the most marked declines are in the mineral,
78 E C O N O M I A , Spring 2005
leather, plastic, apparel, and footwear sectors. In very general terms, this
means, for instance, that some producers based in Costa Rica have greater
leeway to procure inputs or perform operations outside the PTA zone
under the recently signed CAFTA than they do under the 1995 Costa
Rica–Mexico free trade agreement. What is more, NAFTA itself is liberalizing some of its rules of origin.24 The Working Group in charge of the
rules-of-origin review process is designing new rules of origin on the basis
of consultations with consumers and producers and a review of the rulesof-origin protocols that each NAFTA member country has negotiated in
their post-NAFTA free trade agreements, such as the United States with
Singapore or Mexico with the European Union. If this latter process results
in interregime rules-of-origin borrowing, it could enhance convergence
between the NAFTA rules of origin and the rules of origin of other regimes
around the world.
The Political Economy of Rules of Origin
This section examines why rules of origin are chosen as policy instruments
in preferential trade. After all, integrating governments could simply exclude
the potentially trade-deflecting sectors from the PTA’s coverage, or put in
place a common external tariff covering all products. We also consider
why restrictive and selective rules-of-origin regimes have gained ground
over the past few years.
The Choice of Rules of Origin as a Policy Instrument
Studies on political economy widely concur that using rules of origin as a
key policy instrument serves to pay off import-competing lobbies jeopar-
24. The initial set of revised NAFTA rules of origin took effect on 1 January 2003; they
involve alcoholic beverages, petroleum/topped crude, esters of glycerol, pearl jewelry,
headphones with microphones, chassis fitted with engines, and photocopiers. See “Regulations Amending the NAFTA Rule of Origin Regulations,” Canada Gazette, 1 January 2003
(available at canadagazette.gc.ca/partII/2003/20030115/html/sor24-e.html). In July 2004,
the trade ministers of the NAFTA countries instructed the trilateral Working Group on
Rules of Origin to extend the liberalization drive to chemicals, pharmaceuticals, plastics
and rubber, motor vehicles and their parts, footwear, copper, and all items with a zero mostfavored-nation tariff for all of the NAFTA members. See “A Decade of Achievement,”
NAFTA Free Trade Commission, 16 July 2004 (available at www.freetradealliance.org/
pdf/2004%20Advocacy/JointStatement.pdf).
Antoni Estevadeordal and Kati Suominen
79
dized by PTA formation.25 Rules of origin can be employed to favor intraPTA industry linkages over linkages between the PTA and the rest of the
world and thus to indirectly protect PTA-based input producers vis-à-vis
their rivals outside the PTA.26 If rules of origin provide captive markets
downstream, they may even be superior for the import-competing intermediate producer lobbies than exclusions of their products from the PTA.27
Furthermore, stringent rules of origin can also extend protection to uncompetitive intra-PTA final-good producers. This happens when their extraPTA competitors are too hard-pressed to switch to the components
prescribed by the rules of origin. Even if an extra-PTA firm were to move
operations to the PTA market, the edge of producers with existing intraPTA supply links would continue until the new entrant’s regional sourcing met the rules of origin.28
Rules of origin, in short, enable governments to balance the competing
claims of export lobbies, which seek a liberalizing PTA in which all products are subjected to tariff phase-outs, and import-competing lobbies,
which are intent on halting all liberalization. Rules of origin compensate
and can even benefit import-competing lobbies, while export interests
accept stringent product-specific rules of origin as a preferable and politically attainable alternative to a PTA rife with exclusions.29 Indeed, regimes
with the most stringent rules of origin also tend to feature the highest facilitation values, which may be a sign of counter-lobbying by exporters threatened by the restrictive rules of origin.
Empirical work supports the hypotheses about the protectionist impulses
behind rules of origin. Both Estevadeordal and Suominen find that restrictive rules of origin tend to be put in place in sectors that are also marked by
high most-favored-nation tariffs and long preferential tariff liberalization
25. Rules of origin are a particularly useful trade policy instrument for two reasons.
First, like tariffs, rules of origin are a highly targetable instrument because they are often
negotiated at the product level. Second, unlike the tariff, rules of origin can be defined in
technical and diverse terms, so they can be tailored differently for each individual good, while
their presumed protection can be hidden since rules of origin are not as immediately quantifiable as a tariff.
26. Krueger (1993); Krishna and Krueger (1995).
27. Suominen (2003).
28. Graham and Wilkie (1998). Given that rules of origin hold the potential for increasing local sourcing, governments can also use them to encourage investment in sectors that
provide high value-added or jobs (Jensen-Moran, 1996; Hirsch, 2002).
29. Suominen (2003).
80 E C O N O M I A , Spring 2005
phase-out schedules.30 Sanguinetti and Bianchi encounter similar evidence
in Mercosur’s rules-of-origin regime.31
Explaining Rules of Origin Trends
Because they use rules of origin as a trade policy instrument, governments
expend considerable time and resources on the tedious, technical, and
often highly contentious crafting of the rules-of-origin protocols. But why
have rules of origin become more restrictive over time? One possibility is
that the liberalization of most-favored-nation treatment and the growth of
global trade have strengthened export lobbies, while antagonizing importcompeting interests. Governments find themselves under growing pressures from export interests to produce deeper trade liberalization, so they
have had to develop targetable and effective tools, such as product-specific
rules of origin, to compensate the potential losers from liberalization. In
the case of NAFTA, for example, neither the deep preferences nor the sustained political support for the agreement would have been possible without a stringent rules-of-origin regime. Earlier integration schemes, such as
LAIA, were less liberalizing than NAFTA; they managed the potential
losers’ concerns in the tariff schedules, which obviated the need to create
a sturdy set of new compensation tools within the PTA. It is thus no accident that the ambitious liberalization of today’s PTAs is accompanied by
restrictive rules of origin.
Another, complementary explanation is that the growing propensity
to fragment global production presents a threat to import-competing
intermediate-good providers, who, in turn, see stringent rules of origin as
an opportunity to discourage final-good producers from outsourcing or
shifting production abroad.32 This notion implies that PTA formation
could be driven by protectionist interests.
As noted above, however, the restrictiveness of rules of origin appears
to have declined somewhat in the microcosm of NAFTA-model regimes
over the past decade. This trend has three potential explanations beyond
the potential strengthening of export lobbies in the Americas since the
mid-1990s. First, NAFTA partners have had time to learn about the implications of the different types of rules of origin. NAFTA is one of the first
regimes in the world to establish rules of origin tailored individually for
30. Estevadeordal (2000); Suominen (2003, 2004).
31. Sanguinetti and Bianchi (2005).
32. Suominen (2003).
Antoni Estevadeordal and Kati Suominen
81
each product; both governments and business lobbies thus lacked
information on the effects of rules of origin when the NAFTA rules were
first negotiated. NAFTA-based exporters and producers are widely perceived as having grown to find the rules-of-origin regime excessively
restrictive.33
Second, the newer regimes may be endogenous to the prior ones. Countries integrating with the United States after Mexico did so—namely,
Chile and the Central American countries—may have sought terms that
are more favorable than those attained by Mexico in order to rapidly bring
themselves on a par with the existing U.S. partners in the U.S. preferential
market.34
The third explanation negates the other two: the reduced restrictiveness
may have little to do with temporal dynamics, but rather may simply be
caused by other variables, such as bilateral trade volumes and the types of
goods produced by the different partners. One hypothesis is that newer
regimes may have achieved the same level of protection provided by
NAFTA through using less stringent rules of origin. Detailed time-series
data on the utilization rates of tariff preferences in the different NAFTAmodel PTAs would help illuminate whether this is the case.35
The Effects of Rules of Origin
We now turn to the potential economic effects of rules of origin. Recent
research indicates that rules of origin can increase firms’ administrative
and production costs, and both costs can introduce protectionist biases that
hamper the free flow of trade and investment. The differences across rulesof-origin regimes may generate transaction costs, but these have yet to receive
empirical scrutiny. We consider the three costs in turn.
33. In theory at least, stringent NAFTA rules of origin may have caused competitive
extraregional producers to move their production facilities to the NAFTA region. In
response, affected intraregional producers who initially favored restrictive rules of origin
may have grown disposed to loosening the rules-of-origin regime.
34. Perhaps less plausibly, the fact that all recent free trade agreements have been negotiated in the shadow of the FTAA process may have provided the NAFTA-model adherents
incentives to define a rules-of-origin model that is more acceptable to all countries of the
hemisphere than the FTAA rules-of-origin regime. This assumes that the adherents to the
NAFTA model favor the adoption of the FTAA.
35. The pattern would not be universal, however, given that the European Union has
implemented the identical rules-of-origin regime across all its partners.
82 E C O N O M I A , Spring 2005
Administrative and Production Costs
The administrative costs of rules of origin stem from the procedures
required for ascertaining compliance with the regime. They are essentially
bookkeeping costs for the exporter—the paperwork and costs associated
with certifying origin—and the costs incurred by the partner country’s customs in verifying origin. The administrative costs can be considerable
even in regimes using self-certification.36 Cadot, Estevadeordal, and SuwaEisenmann disentangle NAFTA’s administrative costs into those associated
with rules of origin and those that are not; they find the former to approximate
two percent of the value of Mexican exports to the U.S. market.37
The production costs of rules of origin arise from the various technical
criteria imposed by the rules-of-origin regime. If rules of origin encourage final-good producers to use intra-PTA sources even when cheaper
supplies are available in the rest of the world, then the rules of origin raise
production costs and thus likely dampen the PTA’s trade-creating potential. Rules of origin can also create trade diversion in intermediates if
they give an unnatural boost to intra-PTA purchases of intermediate
goods. However, if the costs of complying with the rules-of-origin regime
exceed the benefits of the PTA-conferred preferences, then final-good
producers might cease to use the preferential channel, obtaining intermediates from the rest of the world and exporting final goods under the mostfavored-nation regime instead. Status quo would ensue, with the PTA
having no effect on trade. Meanwhile, the various facilitating regimewide
rules of origin should have the opposite effect, helping the PTA channel
to flourish.
36. Many regimes call for self-certification, including NAFTA, CAFTA, and the
U.S.-Chile, Mexico–Costa Rica, Canada-Chile, Central American Common Market
(CACM), CACM-Chile, Chile-Korea, U.S.-Singapore, and U.S.-Jordan agreements. The
Mexico-Bolivia agreement implements self-certification after an initial four-year period of
two-step private and public certification. The pan-European, European Union–Mexico,
and European Union–Chile agreements are mostly based on two-step private and public
certification, with limited self-certification. The G3 agreement, LAIA, the Common Market for Eastern and Southern Africa (COMESA), and the Southern African Development
Community (SADC) specify two-step private and public certification, whereas Mercosur, Mercosur-Chile, Mercosur-Bolivia, Andean Community, Caribbean Community
(CARICOM), and most rules-of-origin regimes in Asia and the Pacific rely on public
certification or delegate certification to a private entity. See Estevadeordal and Suominen
(2005a); Suominen (2004).
37. Cadot, Estevadeordal, and Suwa-Eisenmann (2005).
Antoni Estevadeordal and Kati Suominen
83
Estevadeordal and Suominen provide the most comprehensive analysis to
date on the implications of rules of origin for trade, based on a 155-country
gravity model spanning twenty-one years.38 They reach four main conclusions. First, restrictive and selective product-specific rules of origin—that is,
rules of origin that can be expected to increase production and administrative costs—undermine bilateral trade flows. This indicates that stringent rules
of origin do undermine PTAs’ trade-creating potential. Second, de minimis
levels, diagonal and full cumulation, drawback, and self-certification—which
can be expected to reduce a rules-of-origin regime’s production and administrative costs—foster bilateral trade. This suggests that lenient regimewide
rules of origin may counteract the negative effects of stringent productspecific rules of origin. Third, restrictive rules of origin in final goods
encourage bilateral trade in intermediate goods. As such, restrictive rules of
origin may result in trade diversion to the PTA area. Fourth, the trade effects
of rules of origin change over time: the negative effects of stringent rules
of origin gradually decrease, while the positive effects of permissive
regimewide rules of origin increase. This suggests that exporters learn to
comply with product-specific rules of origin and to take advantage of
regimewide rules of origin.
Other, single-regime studies on the trade effects of rules of origin
reach similar results, as do the closely related studies on usage rates of
PTA preferences.39 Estevadeordal and Miller document missed preferences (or utilization rates below 100 percent) between the United States
and Canada, which they attribute to the tightening of the rules of origin
under NAFTA in 1994.40 Cadot, Estevadeordal, and Suwa-Eisenmann
38. Estevadeordal and Suominen (2005b); Suominen (2004).
39. Cadot, Estevadeordal, and Suwa-Eisenmann (2005), focusing on NAFTA, show
that stringent rules of origin have undermined Mexico’s aggregate exports to the United
States. The United States played a key role in establishing NAFTA’s Uniform Regulations
and rules-of-origin enforcement mechanisms. In January 1995, the United States found a
high compliance rate among Mexican and Canadian exporters and producers on rules of origin, at 90 percent and 80 percent, respectively (Reyna, 1995, pp. 37–38). Appiah (1999) also
examines NAFTA, but using a three-country, multisector computable general equilibrium
(CGE) model; he finds that rules of origin distort trade flows, diverting resources from their
most efficient uses and undercutting global welfare. James (2004) posits that NAFTA preferences and restrictive rules of origin have undercut Asian textile and apparel exports to the
United States. Flatters and Kirk (2005) find that restrictive South African Development
Community (SADC) rules of origin work against efficiency gains that the members could
reach through outsourcing outside the PTA area.
40. Estevadeordal and Miller (2002).
84 E C O N O M I A , Spring 2005
link the mere 64 percent utilization rate of NAFTA preferences to stringent rules of origin.41
In addition to their short-run trade effects, stringent rules of origin may
cause investment diversion in the long run. This occurs when extra-PTA
final-good producers move production to the PTA area with the sole purpose of meeting the rules of origin, even if the PTA is not the most efficient location for production. Rules of origin can also divert investment
within the PTA. Final-good producers may want to get around rules of origin by moving production to the territory of the PTA partner that has the
largest domestic demand or the lowest external tariff on third-country
inputs (or both)—such as the United States in NAFTA.42 From a theoretical perspective, requirements for a high regional value content can paradoxically encourage investment to the PTA country that has the highest
production costs (that is, is the most inefficient producer), because goods
made in member countries with low production costs may be hard-pressed
to meet the rules of origin. Rodriguez theorizes that stringent rules of origin
can lead to distortions in production structures within the PTA, while Estevadeordal, López-Córdova, and Suominen encounter preliminary empirical
evidence that flexible rules of origin are conducive to foreign direct investment (FDI) inflows.43
Transaction Costs
Analysts have yet to understand whether differences among rules-oforigin regimes generate transaction costs and impart economic effects.44
41. Cadot, Estevadeordal, and Suwa-Eisenmann (2005). Krueger (1993) reports that
under NAFTA’s predecessor (the U.S.-Canada free trade agreement), Canadian producers
opted to pay the tariff rather than go through the administrative hurdles to meet the rules of
origin. Brenton (2003) and Inama (2004) show that rules of origin shape developing countries’ odds of qualifying for treatment under the generalized system of preference.
42. For example, a Mexican and a U.S. firm selling on the U.S. market and purchasing
their inputs from outside the NAFTA region would be treated unequally under NAFTA: the
Mexican firm would be disadvantaged vis-à-vis the U.S. firm because it fails to meet the
rules of origin required to export to the U.S. market (Graham and Wilkie, 1998, p. 110).
43. Rodriguez (2001); Estevadeordal, López-Córdova, and Suominen (2004).
44. Garay and Cornejo (2002) provide the only rigorous examination of the diversity in
rules of origin across regimes. They evaluate the correlations between types of rules of origin in NAFTA, CACM, Mercosur’s free trade agreements, and Mexico’s free trade agreements. The study finds that only 10 percent of the product-specific rules of origin are exactly
identical or highly similar between the regimes, although up to 75 percent of the rules of origin in most chapters within both the Mercosur and Mexican regimes are highly similar.
Antoni Estevadeordal and Kati Suominen
85
Any adverse effects would clearly be heaviest for countries that are party
to several relatively different rules-of-origin models, such as Chile and
Costa Rica. These so-called spoke countries require customs that are wellequipped to verify and implement the different rules-of-origin regimes, and
they may eventually have to tailor their production structures differently
for each PTA market.45 This generates transaction costs that would be nil
in a world with one rules-of-origin model. The costs will be highest for
small producers in spokes with a narrow domestic sourcing base. In contrast, producers and customs alike in rules-of-origin hubs—such as the
European Union, Mercosur, Mexico, and the United States—escape most
of these costs. If the transaction costs of operating on many PTA fronts
become excessive, then producers in spoke countries may be compelled to
specialize for one preferential channel over the others.46 At the global
level, the market specialization induced by rules of origin could give rise
to policy-driven, trade-diverting PTA hubs.
Other factors, however, could mitigate the costs associated with crossregime differences. First, a small producer generally produces only a few
items and would thus need to apply only a couple of different rules of
origin when exporting to the various preferential markets. Multinational
companies selling a variety of goods in different markets may face greater
complexity, but they are also better equipped to economize any transaction costs given their superior human, technical, and financial capacities.
Second, even when rules of origin differ across PTA markets, a single
production process may qualify for preferential treatment in each market.
45. Consider a Chilean producer of typewriters (heading 8469): the firm will have to
comply with rules of origin that stipulate a ceiling of 50 percent import content to enter the
European Union; a change of subheading (except from subheading 8469.12) to enter the
United States; a change of heading to enter Korea (except from heading 84.13 or, alternatively, a change from heading 84.13, provided the regional value content is not less than
45 percent using the build-down method or not less than 30 percent using the build-up
method); and a 60 percent regional value content (that is, a ceiling of 40 percent import content) to enter Mercosur. Meanwhile, a European Union producer in the same heading can
use the same rules of origin—50 percent import content—to enter Mexico, Chile, South
Africa, and the whole pan-European system. This example also illustrates the comparative
complexities faced by customs: if each rules-of-origin regime stipulates rules of origin for
5,000 products, the Chilean customs would basically have to verify 20,000 different rules
of origin, whereas customs in the European Union countries would only need to verify
5,000 rules of origin.
46. Inter-PTA divergences also allow countries wishing to join these preferential
arrangements to engage in PTA shopping, choosing to join the agreements that best accommodate their existing domestic standards and interests, rather than joining PTAs that are liberalizing, neutral vis-à-vis third parties, and welfare-enhancing.
86 E C O N O M I A , Spring 2005
Much depends on the idiosyncrasies of the product and production process
in question. Finally, regimewide facilitation mechanisms can go a long
way toward reducing the effects of the cross-regime incompatibilities in
product-specific rules of origin.
Avenues for Future Research
Our understanding of the effects of rules of origin is far from complete. The
costs of differences across rules-of-origin regimes await analysis. Three
avenues for future empirical research would be particularly fruitful. The
first involves the long-term effects of rules of origin, particularly in light
of the interplay of intermediate and final goods markets. While restrictive
rules of origin may initially dampen intra-PTA trade in final goods by
increasing the cost of intermediate goods, the subsequent decline in the
demand of intermediates should lower their price and thus revive both the
demand for them and the intra-PTA trade in final goods.47
The second avenue for research is the economic impact of the certification and verification costs of rules of origin, together with the potential
trade-off between the different certification methods, on the one hand, and
verification costs, on the other. For example, do regimes using the selfcertification method increase the costs of verifying origin, such that the
low transaction costs of certifying origin translate into high transaction
costs of verifying origin?
Finally, the welfare effects of rules of origin remain uncharted.48 Capturing welfare effects will undoubtedly prove challenging, given that rulesof-origin regimes carry frictions—including restrictiveness, selectivity, and
various regimewide components—that work in different directions.
Policy Recommendations on Rules-of-Origin Systems for the Americas
This study has analyzed the structure and evolution of rules-of-origin
regimes in the Americas and reviewed the latest research results on the
effects of rules of origin. The main findings are three-fold: stringent rules
of origin can be used as a tool to pay off protectionist sectors in a PTA and
thus to foster the political prospects of PTAs; the NAFTA rules-of-origin
47. See Ju and Krishna (1998) and Duttagupta and Panagariya (2001).
48. Appiah (1999) finds that rules of origin undermine welfare in the case of NAFTA,
although his operationalization of rules of origin in a CGE framework is rather crude.
Antoni Estevadeordal and Kati Suominen
87
model gaining force in the Americas carries relatively restrictive rules of
origin; and restrictive rules of origin can undercut the liberalizing potential of PTAs. Taken together, these findings raise concerns about the ultimate economic effects of the Americas’ expanding PTA bowl. They also
raise legal concerns: stringent rules of origin may breach Article XXIV of
the General Agreements on Tariffs and Trade (GATT), which in paragraph
8(b) defines a free trade area as “a group of two or more customs territories
in which the duties and other restrictive regulations of commerce . . . are
eliminated on substantially all the trade between the constituent territories
in products originating in such territories.” Indeed, the WTO has recently
recognized rules of origin as constituting part of “other regulations of
commerce.”49 Since rules of origin have implications for extra-PTA parties’ access to the PTA market, they also risk violating paragraph 5 of Article XXIV, which prohibits PTAs that raise barriers toward the rest of the
world from the pre-PTA levels.50
The evolution of the hemisphere’s rules-of-origin regimes also provides reasons for optimism, however, and the region’s countries have a
number of policy options for reducing the potential negative effects of
rules of origin. The rest of this section addresses these two issues.
Encouraging Patterns in Rules of Origin in the Americas
The countries of the Americas have five reasons to be optimistic about the
evolution of the regional rules-of-origin regimes. Each also augurs well
for the design and implementation of the FTAA rules of origin. First, the
most recent rules-of-origin regimes based on the NAFTA model—namely,
the U.S.-Chile free trade agreement and CAFTA—incorporate simpler,
more practical, and less restrictive product-specific rules of origin than
NAFTA. This evinces a trend toward market-friendly rules of origin in the
hemisphere. The NAFTA review process will provide a further boost to
the NAFTA system’s liberalization of its rules of origin.
Second, the various regimes designed after NAFTA are fairly similar
vis-à-vis each other, in both the types of rules of origin specified and their
level of restrictiveness. This can help reduce any potential transaction
49. See, for instance, WTO (2002a). Ambiguities remain as to the meaning of “substantially all the trade.”
50. The WTO Negotiation Group on Rules is advocating a case-by-case analysis of the
potentially restrictive effects of preferential rules of origin on extra-PTA parties (WTO,
2002a).
88 E C O N O M I A , Spring 2005
costs for NAFTA-model adherents that export under preferential terms to
two or more NAFTA-model PTAs. NAFTA’s review of its rules of origin
may engender further interregime compatibilities, thereby paving the way
for diagonal cumulation linking the NAFTA-model free trade agreements.
Third, the NAFTA-style regimes apply relatively lenient facilitation terms.
This helps alleviate the compliance costs of the product-specific rules of origin. Even more encouraging is the movement toward somewhat higher de
minimis levels and the willingness to experiment with diagonal cumulation,
as evidenced in CAFTA. Cumulation is crucial even in the presence of identical product-specific rules of origin across PTAs. Augier, Gasiorek, and
Lai-Tong find that bilateral trade is up to 52 percent lower than expected
between two spoke countries that have identical rules-of-origin protocols
with the same hub, but that are not linked by diagonal cumulation.51
Fourth, the NAFTA model has now been adopted in numerous free trade
agreements. The current adherents will thus find it fairly easy to negotiate,
adopt, and implement future free trade agreements. Should the FTAA come
to carry NAFTA-type rules of origin, the costs of adjusting to its rules-oforigin regime would be low for a good part of the hemisphere.
Finally, negotiators on rules of origin throughout the Americas, and
particularly in free trade agreements based on the NAFTA model, have
proved their willingness to revise existing rules-of-origin regimes to make
them more flexible. NAFTA’s review of its rules of origin is the clearest
example, demonstrating commitment to keeping North America’s rules of
origin apace with changes in technology and the globalization of production, and potentially marking a growing role of export interests in setting
trade policy.
More generally, the precision of the NAFTA-model rules of origin is
superior to the vaguely defined and subjective rules of origin of the past.
Precision provides clarity and certainty to traders and customs alike. Because
the NAFTA regime is based on the change in tariff classification, it provides a fairer, more transparent, and more easily verifiable rules-of-origin
model than regimes based on value content, which paradoxically can be
hard to meet in countries with low production costs and are difficult to
implement in the face of fluctuations in exchange rates and changes in production costs. Precise rules of origin do not need to be restrictive rules of
origin; the NAFTA review process may well yield rules of origin that are
both precise and flexible.
51. Augier, Gasiorek, and Lai-Tong (2004).
Antoni Estevadeordal and Kati Suominen
89
Tackling the Negative Effects of Rules of Origin: Flexible Rules of Origin
plus Hemispheric Cumulation
The positive trends in the Americas notwithstanding, potential sources of
friction remain: stringent and selective rules of origin still govern many
sectors, and the various regimes differ markedly, even across the subset of
regimes based on the NAFTA model. How can entrepreneurs obtain inputs
from the cheapest sources, firms exploit cross-border economies of scale, and
multinational companies make sweeping investment decisions based on economic efficiency? How can producers in spoke countries qualify for all the
preferential markets simultaneously without undue transactions costs? What
are the best ways to counter the rise of trade- and investment-diverting hubs?
The simplest way to preempt the negative effects of rules of origin
would be to bring most-favored-nation tariffs to zero globally, although
this is not likely to become politically palatable in the near future. A further
option would be to move from free trade agreements to customs unions
with low common external tariffs, thereby eliminating rules of origin altogether, or, alternatively, to harmonize preferential rules of origin at the
multilateral level, which would ensure compatible requirements across
spoke producers’ export markets. However, the founding of customs
unions with an across-the-board common external tariff has proved difficult outside the European Union; rules of origin will thus remain an issue
as long as a common external tariff does not cover all product categories.52
Meanwhile, the prospect of global harmonization of preferential rules of
origin is still relatively distant.
Two shorter-term policy options are more realistic. First, the existing
regional rules-of-origin spaghetti bowl can be revised. PTA members
should strive to design and revise their rules-of-origin regimes to establish
transparent, simple, precise, nonrestrictive product-specific rules of origin,
such as a change in heading or subheading, and they should put in place
lenient regimewide rules of origin, in particular a high de minimis level.
Such rules of origin alone would reduce the frictions within and between
PTAs. The hemisphere’s PTAs should be interconnected through diagonal
cumulation—a task that would be relatively uncomplicated to implement in
the presence of readily harmonized origin regimes and would pave the way
52. NAFTA contains a small sectoral customs union, with a common external tariff
governing certain automatic data-processing goods and their parts. The tariff ranges from
zero to 3.9 percent. See NAFTA Annex 308. (The full text of NAFTA is available at
www.sice.oas.org/trade/nafta/naftatce.asp.)
90 E C O N O M I A , Spring 2005
to a regionwide trade and production base. The countries of the Americas
should also improve training for exporters and customs about the technical
requirements and implementation of rules of origin. These measures would
help shorten the learning lags associated with rules of origin, reduce the
administrative hurdles facing both exporters and customs, provide small
countries access to larger pools of intermediate goods, and allow spoke
economies to trade on several different fronts by applying the same rules of
origin. This, in turn, would ensure that the hemisphere continues to enjoy
the benefits of open regionalism. The movement from the complex and
restrictive NAFTA rules-of-origin regime to the simpler and less restrictive
U.S.-Chile free trade agreement and CAFTA is an encouraging step, and it
should be furthered in future regimes.
Second, the FTAA would automatically sort out the rules-of-origin
spaghetti bowl and put in place a hemispherewide cumulation zone—no
small feat given that the countries of the Americas contain a sizable subsample of the world’s PTAs.53 An optimal FTAA rules-of-origin outcome
would establish simple, nonrestrictive product-specific rules of origin and,
again, lenient regimewide rules of origin. The overall framework could be
buttressed with ad hoc innovative measures designed to accommodate the
partners’ idiosyncratic production patterns and capabilities. Thus construed, the FTAA would also prove that the hemisphere’s existing PTAs
represent genuine building blocks for regionwide trade liberalization.54
To be sure, all hopes should not be pinned on the FTAA. Much work
remains to be done to reconcile the various partner countries’ rules-oforigin preferences, and the FTAA project per se has been troubled over
the past several months. Nonetheless, the FTAA might prove to be the
only way to integrate the NAFTA- and Mercosur-model rules-of-origin
53. Countries (and regions such as Mercosur) have thus far submitted rules-of-origin
proposals for chapters 1–40. Each product tends to feature five to ten different proposals.
54. The hemisphere’s trade ministers proposed in November 2003 a two-tiered FTAA,
with the first tier of keen integrators adopting deep commitments and wide tariff liberalization across the tariff universe and the second tier opting for shallower commitments and a
narrower list of liberalized products. Two cumulation zones would likely result—one with
all member countries and a narrower range of goods, and another with the wider liberalizers in the additional set of goods. Cumulation in both tiers could be complemented with
some ad hoc tools, such as phasing in the rules-of-origin regime, particularly for the smaller
countries. Should this structure result, countries in the two tiers would be able to cumulate
in the products they have liberalized with partners that have liberalized the same goods.
Wider liberalizers would thus cumulate among each other in a broad range of goods, while
all countries would cumulate in the narrower range to which the second-tier countries have
acceded. See Blanco, Zabludovsky, and Gómez Lora (2004).
Antoni Estevadeordal and Kati Suominen
91
regimes.55 It could also facilitate the prospects of multilateral harmonization of preferential rules of origin.
Whether accomplished through interlinking PTAs or through the FTAA,
a hemispherewide cumulation zone appears to be the most promising
option—particularly when its rules of origin are flexible enough to prevent
trade diversion. A sustained fluid operation of a hemispherewide cumulation zone will require solid verification tools. Poor verification is a major
problem in most of Latin America, and it has been accentuated by the
growing inflows of goods, particularly from Asia. This situation could
provoke a backlash against regional trade liberalization. The strong verification regime that CAFTA introduces in the textile and apparel sector
could serve as a starting point, along with technical assistance to countries
with the most feeble verification systems. Information technology should
be fully harnessed to facilitate verification.56
The countries of the Americas cannot afford to pursue new policies
only within the hemisphere, but should push their WTO partners on two
fronts. First, they should call for launching the harmonization of the world’s
preferential rules-of-origin regimes. This option is increasingly timely
given the proliferation of free trade agreements with different rules of origin around the world and, in particular, the establishment of free trade
agreements between the hemisphere’s countries and extraregional partners. Harmonizing multilateral rules of origin is hardly a novel idea, but
rather is a long-standing international commitment: the Uruguay Round
Agreement on Rules of Origin stipulates that once the signatories conclude the harmonization of nonpreferential rules of origin, they will move
to harmonize preferential rules of origin, using the relatively flexible and
simple harmonized nonpreferential rules of origin as a blueprint.
The second multilateral policy that the countries of the Americas should
pursue is the lowering of tariffs and nontariff barriers. The higher the PTA
partners’ most-favored-nation barriers, the wider the preferential margins
and the greater the willingness of firms in the partner countries to comply
55. Even if the different hemispheric rules-of-origin regimes were left to coexist with
the FTAA rules of origin (as occurred with the Central American Common Market and
CAFTA rules of origin), exporters would be better off for two reasons: first, firms could
choose between two alternative rules of origin when trading with their pre-FTAA PTA partners, and second, the FTAA rules of origin could be less restrictive, in practice, than the
prior PTA rules of origin—even if they are more restrictive on paper—because the FTAA
cumulation zone is vastly expanding the pool of inputs available to any member country.
We thank Jeremy Harris for pointing this out.
56. See Cornejo (2004).
92 E C O N O M I A , Spring 2005
even with costly and distortionary rules of origin. The expansion of the
PTA spaghetti bowl must be accompanied by open regionalism, in which
most-favored-nation liberalization proceeds hand-in-hand with preferential
opening.57
Conclusion
This paper has analyzed the various rules-of-origin regimes in the Americas, reviewed the latest research findings on the effects of rules of origin,
and provided policy recommendations for the region’s countries to reduce
the adverse economic impact of rules of origin. We have found that the
NAFTA rules-of-origin model, which is expanding in the hemisphere, carries restrictive and complex rules of origin, and such rules of origin can
counteract PTA-inspired trade liberalization. These findings raise concerns about the hemisphere’s increasingly complex rules-of-origin bowl.
The worrisome features can be tamed, however, through regional cooperation, in particular the adoption of simple and transparent product-specific
rules of origin, the incorporation of mechanisms to promote regimewide
flexibility, and the implementation of cross-PTA diagonal cumulation.
Given the globalization of regional integration—that is, the movement of
regional partners to negotiate interregional agreements—the countries of the
Americas should also live up to the Uruguay Round commitment of harmonizing preferential rules of origin at the global level.
Preferential rules of origin matter only as long as there are multilateral
barriers to trade. If there is a silver bullet for reducing the negative effects
of rules of origin, it is the multilateral liberalization of tariffs and nontariff
barriers. If the Doha Round negotiators succeed in producing deep cuts in
most-favored-nation tariffs and nontariff barriers, and if the proliferation of
PTAs engenders a dynamic of competitive liberalization worldwide, the
importance of preferential rules of origin as gatekeepers of commerce will
progressively dissolve.
57. See Bergsten (1997) and Wonnacott (1996). Wonnacott suggests that free trade
agreements should be replaced by customs unions or a hybrid arrangements of customs
unions and free trade agreements, lest the benefits of preferential opening be lost.
Comments
Pablo Sanguinetti: This is a very interesting paper that deals with an
important and often neglected aspect of preferential trading agreements
(PTAs), namely, the determination of rules of origin. Rules of origin are
the regulations that determine under what circumstances a good is considered to be produced in the region and thus able to enjoy the preferential
tariff treatment. The definition of these regimes, which is mainly the concern of lawyers and policy practitioners, could have important economic
impacts on trade and investment flows. Rules of origin have therefore
become an alternative trade policy instrument targeted by governments
and especially by the private sector in the integrating countries.
The paper does four things. First, it offers a very complete and detailed
survey of the various rules-of-origin regimes that have been put in place in
the context of the huge increase in PTA initiatives for the world economy
and the Americas in particular over the last fifteen years. Second, the paper
draws on the political economy literature to examine why the use of rules
of origin has become such an important policy for government and private
sector lobbies and why the level of restriction implied by rules of origin
has increased over time. Third, given what the (positive) theory predicts
regarding why rules of origin are established, the paper summarizes the
evidence about the effects of these regulations on trade and investment
flows. Finally, the paper ends with policy recommendations. I concentrate
my comments on the first two of these issues: the features of the various
rules-of-origin regimes in the Americas and the political economy aspects
of these rules.
On the Extension of the Restrictive NAFTA Model in the Americas
The paper concludes that the NAFTA model of rules of origin, which has
been widely applied in the Americas since the second half of the 1990s,
is much more restrictive and selective than the rules included in previous
93
94 E C O N O M I A , Spring 2005
agreements like the old LAIA system and also those applied in Mercosur
and in the free trade agreements between Mercosur and Chile and Bolivia.
Is this bad news for free trade in the region? To a certain extent, it is not
surprising that the NAFTA model has been extended to various free trade
agreements in the Americas. Many of these new free trade agreements
were signed by NAFTA member countries (including all the bilateral free
trade agreement signed by the United States), which presumably would
establish similar rules in their new agreements in the interest of internal
consistency and for the same political reasons that originated the NAFTA
rules-of-origin system. It is also not surprising that the NAFTA-type rulesof-origin regime is more restrictive than those established in previous preferential trade initiatives. As the authors mention, initiatives such as LAIA
were much less ambitious than NAFTA, and many sectors and goods were
exempted from free trade. Import-competing producers did not have to ask
for an alternative mechanism to receive some sort of import relief because
they were already excluded from the agreements. The free trade agreements signed since the beginning of the 1990s, however, are more in
accordance with Article 24 of GATT in that they cover a significant part
of trade and go much deeper in terms of eliminating trade barriers (even
compared to unilateral or multilateral liberalization schemes). Governments and import-competing sectors naturally try to target additional
measures like rules of origin to ease the cost of adjustment for sensitive
sectors. This reasoning implies that this development is not necessarily
bad news for free trade in the Americas, since the extension of rules of origin is precisely a reaction to further trade integration. On the other hand,
the impact of these added restrictions may partially undo the gains from
liberalization resulting from decreasing tariffs.
Mercosur differs from NAFTA in that it is an incomplete customs
union, which has certain advantages. Since the main normative argument
for adopting rules of origin is to avoid trade deflection (that is, imports
entering the member country with the lowest tariff and being reshipped to
the other partners with no additional tariffs), rules of origin are not relevant for items that have already converged to the common external tariff
of the trade union. One would therefore expect a more lenient regime in
Mercosur than in NAFTA. By the same argument, Mercosur rules of origin should also be less restrictive than those included in the free trade
agreements signed by Mercosur with other countries, like Chile and Bolivia.
Table 3 presents an index that measures the degree of restrictiveness of the
Mercosur, Mercosur-Bolivia, and Mercosur-Chile regimes. The index
Antoni Estevadeordal and Kati Suominen
95
T A B L E 3 . Mercosur: Rules-of-Origin Index, by Manufacturing Sectora
Sector
Mercosur
Mercosur-Bolivia
Mercosur-Chile
Food, beverages, and tobacco
Textiles, apparel, and leather
Wood products
Paper and printing
Chemicals
Nonmetallic products
Basic metal products
Metal products, machinery, and equipment
Other manufacturing products
1.3
1.8
1.0
1.2
2.5
1.1
1.7
1.6
1.0
1.7
2.9
1.7
1.4
2.7
1.2
2.6
2.0
1.3
1.4
2.9
1.4
1.3
2.6
1.1
2.6
1.9
1.2
Total
1.7
2.3
2.2
Source: Sanguinetti and Bianchi (2005).
a. The index ranges from one to four, with one being the most lenient regime and four the most restrictive.
ranges from one to four, with one being the most lenient regime and four
the most restrictive.1 The overall level of restriction implied by rules-oforigin rules is 1.7 for intra-Mercosur trade, 2.2 for Mercosur-Chile trade,
and 2.3 for Mercosur-Bolivia. The table also shows that sectors like textiles, chemicals and basic metal products (steel) are among those most
affected by these regulations. Estevadeordal and Suominen find similar
results for NAFTA.
Despite the fact that Mercosur is an incomplete customs union (so that
rules of origin should only matter for items that are exempted from the common external tariff, as mentioned above), in practice, the rules-of-origin
regime is applied to all items independently of whether they are included in
the common external tariff. This evidence confirms that these rules are used
not only for the normative prescription of avoiding trade deflection, but also
as a policy tool that could potentially offer some type of import protection.
On the Political Economy of Rules of Origin
Given that rules of origin can function as a protectionist device within the
context of free trade agreements, how does a political economy approach
change the normative prescription about the emergence of free trade agreements and the role of these regulations? What are their determinants, and
1. This index is developed in Sanguinetti and Bianchi (2005) and closely follows the
methodology presented in Estevadeordal (2000).
96 E C O N O M I A , Spring 2005
how do they relate to other key trade policy variables like tariff preferences?
The paper addresses some of these concerns, but I wish to offer some comments to complement the authors’ discussion.2
Grossman and Helpman provide a political economy model of the emergence of free trade agreements.3 According to their approach, the decision
of whether to form a free trade agreement is subject to political pressures
from the potential losers and winners of trade creation and trade diversion.
Grossman and Helpman use the term enhanced protection to describe trade
diversion and reduced protection for trade creation (relative to the tariffridden situation prevalent before the free trade agreement). This approach
suggests that exporters that stand to gain the most from trade diversion in
the partner country will be most in favor of establishing the trade agreement, while import-competing sectors that will suffer from trade creation
originating in imports from the other members will most vividly oppose
the free trade agreement. Thus producers will support a free trade agreement when the probability of generating trade diversion is maximized
and trade creation is minimized. This is the case when, from a normative
point of view, a free trade agreement is not fully justifiable. In practice,
the final result will depend on how efficient these different groups are in
influencing government policy through lobby activity and how the government objective function weights consumer welfare vis-à-vis that of producer groups.
The original Grossman and Helpman model does not address the issue
of intermediate inputs, so it cannot be easily applied to study the endogenous determination of rules of origin. This extension is provided by Cadot,
Estevadeordal, and Suwa-Eisenmann, who present a simple partial equilibrium model in which two countries (North and South) engage in a free
trade agreement and both tariff preferences and rules of origin are jointly
determined.4 They focus on a case in which intermediate-good interests in
the North wish to use the free trade agreement to create a captive market
for their product. These interests lobby their government (though political
contribution, as in Grossman and Helpman) to establish strong rules of origin to obligate Southern final-good producers to source in the North in
order to qualify for preferential access. This clearly reduces the effective
protection that the Southern producers receive for entering into the finalgood market in the North. The authors assume that the South is always on
2.
3.
4.
My comments are based on Sanguinetti and Bianchi (2005).
Grossman and Helpman (1995).
Cadot, Estevadeordal, and Suwa-Eisenmann (2003).
Antoni Estevadeordal and Kati Suominen
97
its participation constraint (that is, effective protection is zero).5 In this
context, deeper tariff preferences for the final goods can sustain stricter
rules of origin. This, in turn, favors the Northern producers because
it raises both the demand for their product and, more important, the
intermediate-good price. The model thus delivers the interesting prediction that this price is not tariff ridden, but depends on demand and supply
(as if the market for this product were closed). This is not surprising; rules
of origin function as a type of quantitative restriction. This framework
leads to the testable implication that the restrictiveness of rules of origin
and tariff preferences are positively associated. This positive association
is documented in Estevadeordal for NAFTA and in Sanguinetti and
Bianchi for Mercosur.6
Summary Remarks
As I indicated at the beginning, this paper by Estevadeordal and Suominen
is a very interesting piece of work that carefully analyzes the political, economic, and policy implications of rules-of-origin regimes in the Americas.
I hope this survey-type of work encourages further research on the topic.
Alberto Trejos: I quite like this paper, which thoroughly addresses the
topic of rules of origin in current and future free trade agreements in the
Americas. Motivations for this kind of work include concerns that the growing complexity of the administration of rules-of-origin regimes will be
compounded as very disparate rules are implemented across different
agreements; the problem that many free trade agreements may use stringent rules of origin as an alternative (and less visible) mechanism for
maintaining high rates of protection; and the possibility that such disparate
rules of origin will turn free trade agreements into a stumbling block,
rather than a building block, in the process of world trade liberalization.
Understanding this topic is necessary if governments are to design the
correct policies, including better free trade agreements, in the future. The
5. In this case, exports of the final good will not increase significantly as a consequence
of the free trade agreement initiative. Thus the lobby for stronger tariff preferences by the
intermediate-good industry in the North will not face strong opposition from the final-good
industry in the same country. There will be very low trade creation in final goods and a
strong trade diversion in intermediates.
6. Estevardeordal (2000); Sanguinetti and Bianchi (2005).
98 E C O N O M I A , Spring 2005
majority of world trade (especially within the Americas) happens today in
the context of free trade agreements or other preferential arrangements in
which rules of origin are applied. Previous work by the same authors illustrates that in the Western Hemisphere the prevalent rules-of-origin
regimes are indeed more restrictive and heterogeneous than in the rest of
the world.
When rules of origin are binding, they can have some of the same
effects as tariffs and other barriers to trade. They discourage trade, require
learning, reduce the rate of utilization of free trade agreements, and redirect investment and trade. Furthermore, the costs of compliance can be
very high, reaching 2 percent of the total value of trade in some cases.
While not as effective as tariffs when used as trade barriers (especially in
comprehensive free trade agreements in which tariff phase-out takes place
across almost all goods), they provide protectionist measures that the general public does not always see and that policymakers have a hard time
quantifying.
The authors measure and assess rules-of-origin regimes according to
the stringency of the rules, the cost of implementing them, their nature,
and their heterogeneity within and across agreements. They find a very
high diversity of rules of origin in the existing free trade agreements and
preference regimes in the Americas, both across agreements and across
goods within a given agreement. The rules of origin can also be very stringent, especially in older free trade agreements.
At the same time, the authors demonstrate that there are some sources
of optimism on this topic. First, newer agreements are less restrictive. Second, as economies become more open and the results of enhancing trade
are appreciated, it becomes easier for governments to negotiate agreements
that boldly go beyond their predecessors. Third, countries that are now
negotiating new free trade agreements show signs of significant learning
from a decade or so of implementing their older agreements. Fourth, to
remain competitive in an environment where others are doing the same,
negotiators of new agreements are producing further liberalization than in
previous agreements. Finally, the most recent free trade agreements have
been negotiated in the context of an imminent Free Trade Area of the
Americas (FTAA), which would much reduce the effectiveness of rules of
origin as trade barriers. (This factor will probably be less meaningful in
free trade agreements negotiated after the modest results of the Miami
ministerial of 2003, which much delayed the expected time of completion
of a comprehensive FTAA.)
Antoni Estevadeordal and Kati Suominen
99
I would add to these causes for optimism the fact that recent agreements
include a variety of new flexibilities to make rules of origin less stringent.
De minimis clauses, phase-ins, tariff preference levels, and, most important, accumulation of origin are the most important of such flexibilities.
The authors similarly mention the possibility of building on the progress
at the WTO on multilateral harmonization of rules of origin in a mostfavored-nation basis; I am not optimistic about achieving relevant progress
there at this time.
While criticisms of the restrictiveness of rules-of-origin regimes are
largely valid, the political economy of trade negotiations is such that restrictive rules of origin are often the only way to maintain a particular product
in the tariff phase-out commitments of a free trade agreement. Not only do
rules of origin give the local producer of the good more protection (in
which case the rules of origin undo some of the progress attained in the
phase-out), but restrictive rules of origin create other winners (the regional
producers of the key inputs to that good), often tilting the balance. Trade
diversion toward the parties involved in a free trade agreement is always
politically more feasible than trade diversion away from them, and this is
used in negotiations to generate political backup for further liberalization.
A flexible rule of origin (which is always preferable, of course) may
reduce the feasibility of achieving a quick tariff reduction in the first place
by shifting the sourcing of materials to third countries. Under that light,
one may see restrictive rules of origin as a necessary, and transitory, evil
in some cases.
The authors neglect to look carefully at the growing web of subregional
agreements in the hemisphere. Mercosur, the Andean Pact, CARICOM, and
the Central American Common Market involve plans of economic integration that go much further than current free trade agreements. These efforts
will probably converge to a situation in which nations that belong to the
same subregional group, in their efforts to construct customs unions, will
homogenize their existing bilateral agreements with third parties, committing to the same rules of origin and allowing for origin accumulation among
the subregional partners. This will probably take a long time to come to
fruition, but when it does it will significantly simplify the “spaghetti bowl”
problem and reduce the distortionary impact of rules of origins.
The authors should also address the question of how rules-of-origin
regimes differ across free trade agreements in another way: while rulesof-origin procedures may be very heterogeneous across different goods
within a given free trade agreement, specific goods might be treated similarly
100 E C O N O M I A , Spring 2005
across different free trade agreements. My impression is that this is the
case for some of the problematic goods, so the effects of current rules-oforigin regimes on FTAA and on future integration are less daunting than a
first read of the paper may suggest.
In general, accumulation of origin that is not limited to subregional
partners is a significant source of optimism that the hemisphere’s rules of
origin will become less onerous, both as trade barriers and as administrative costs. For example, four distinct (but quite similar) agreements existing today bind together, in all directions, a group of four nations (namely,
Canada, Chile, Mexico, and the United States). Costa Rica will join this
group with the enactment of CAFTA, as will the other Central American
Common Market partners once their agreement with Canada is in place. It
should be feasible and desirable for nations in this list to allow, in their
bilateral agreements, origin accumulation with other nations in the list, as
the direct market access to those other parties has already been granted.
That bottom-up mechanism may result in a better way to construct hemispheric integration and solve the problems of the complexity and stringency of rules of origin.
In conclusion, this is a very good and important paper. It is not easy
to figure out how to address this question systematically, and the technical work required for that purpose is certainly daunting. The authors
clearly do a good job there. They ask the right questions and raise many key
points. Perhaps some topics (origin accumulation, in particular) deserve
more attention than was given to them, but the effort clearly achieves
progress.
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