Diagonal Cumulation and Sourcing Decisions
Products must fulfill predetermined rules of origin to be exported under the preferential access granted by a free trade area member. In turn, rules of cumulation establish which countries' inputs qualify when computing the extent of origin of...
| Main Authors: | , |
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| Format: | Working Paper |
| Language: | English |
| Published: |
World Bank, Washington, DC
2019
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| Subjects: | |
| Online Access: | http://documents.worldbank.org/curated/en/976161560386604260/Diagonal-Cumulation-and-Sourcing-Decisions http://hdl.handle.net/10986/31874 |
| Summary: | Products must fulfill predetermined
rules of origin to be exported under the preferential access
granted by a free trade area member. In turn, rules of
cumulation establish which countries' inputs qualify
when computing the extent of origin of a product. Recent
literature shows that restrictive rules of origin affect
sourcing decision by reducing imports of intermediate goods
from third countries relative to free trade area partners.
This paper uses the introduction of the Pan-European
Cumulation System in 1997 to explore the effects of rules of
cumulation on trade in intermediate goods. The system
provided the European Union Free Trade Area's
peripheral partners (''spokes'') the
possibility of cumulating stages of production from more
countries to qualify for preferential access to the European
Union market. Therefore, the system might have altered the
organization of production in European Union centric value
chains. The paper estimates a triple
difference-in-differences specification and exploits
different control groups. The results show that the effects
of rules of cumulation on trade in intermediates are larger,
with the stricter rules of origin applied to the related
final good. When switching from bilateral to diagonal
cumulation, the analysis finds a reduction in spokes'
imports of intermediates from the rest of the world relative
to those from spoke, reinforcing value chain connections
within the cumulation zone. The analysis also finds a
reduction in spokes' imports from the European Union 15
relative to the rest of the world and the Spokes. The
findings suggest that the Pan-European Cumulation System
allowed a reassessment of sourcing decisions: thanks to the
possibility to cumulate, peripheral countries re-organized
global value chain links. |
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