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Assessing the impact of political economy factors on rules of origin under NAFTA, Volume 1
 
Author:Portugal-Perez, Alberto; Country:World;
Date Stored:2009/02/27Document Date:2009/02/01
Document Type:Policy Research Working PaperSubTopics:Economic Theory & Research; Free Trade; Trade Policy; Debt Markets; Trade Law
Language:EnglishMajor Sector:Industry and trade
Rel. Proj ID:1W-Trade Costs & Facilitation -- -- P111051;Region:The World Region
Report Number:WPS4848Sub Sectors:Other domestic and international trade
Collection Title:Policy Research working paper ; no. WPS 4848TF No/Name:TF091539-TRADE COSTS AND FACILITATION
Volume No:1  

Summary: Rules of origin are legitimate policy instruments to prevent trade deflection in a preferential trade agreement short of a customs union. Trade deflection takes place when a product imported into the preferential trade agreement through the member with the lowest external tariff is transhipped to a higher-tariff member, while yielding a benefit for the re-exporter. Yet, when captured by special interest groups, rules of origin can restrict trade beyond what is needed to prevent trade deflection. By how much do political economy factors account for the stringency of rules of origin? This study quantifies the impact of both determinants - those considered "justifiable" because they prevent trade deflection and those deemed to arise from "political economy" forces - on the restrictiveness of rules of origin under the North American Free Trade Agreement, approximated by a restrictiveness index. The main finding is that political economy forces, especially from the United States, raised significantly the restrictiveness of the rules of origin. Indeed, in industries where political-economy forces were strong prior to the North American Free Trade Agreement, as when the U.S. Most Favored Nation tariff was high or the revealed comparative advantage of Mexico (the United States) was strong (weak), more stringent rules of origin were introduced. Thus, stricter rules of origin are associated with higher production costs reducing the potential benefits of enhanced market access that is initially pursued by this type of agreement.

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