Assessing the Impact of Political Economy Factors on Rules of Origin under NAFTA
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...
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| Format: | Policy Research Working Paper |
| Language: | English |
| Published: |
2012
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| Subjects: | |
| Online Access: | http://www-wds.worldbank.org/external/default/main?menuPK=64187510&pagePK=64193027&piPK=64187937&theSitePK=523679&menuPK=64187510&searchMenuPK=64187283&siteName=WDS&entityID=000158349_20090227085315 http://hdl.handle.net/10986/4044 |
| 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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