Comments on “Rules of Originin Major FTAs”

by Inkyo CHEONG and CHO Jungran

RIETI Policy SymposiumAssessing Quality and Impacts of Major FTAs

March 22-23, Tokyo

Antoni EstevadeordalPrincipal Advisor

Integration and Regional Programs Department Inter-American Development Bank

Cheong-Cho: Analysis of “representative” FTAs / RoO

A

B

C

D

FTAs considered

NAFTAEU-MexicoAustralia-NZ CERJapan-Singapore EPAJapan-Mexico EPAASEAN-China FTAKorea-Mexico FTAChile-Korea FTA

The main justification for preferential RoO is to avoid TRADE DEFLECTION (ensure that non-members do not obtain access to PTA preferences)

RoO define the share of inputs that have to be used or production processes that have to be performed within the PTA area in order to benefit from preferential access.

Why preferential RoO ?

FTAs (RoO) have proliferated around the worldRoO can insulate an industry from the FTARoO can protect intermediate good producers by favoring intra-PTA supply linksRoO can attract investment in strategic sectorsRoO effects in the S/R different than in the L/R

Why RoO are so important?

• Theoretical literature shows that restrictive RoO may distort trade, investment, and production patterns

• We need more empirical evidence:• Good news: Evidence that RoO are used to avoid

trade deflection• Bad news: RoO have potential negative impacts on:

– Administrative costs for firms

– Low utilization of preferences

– Effects on final and intermediate goods trade (and investment) patterns

What are the economic impacts of RoO?

Wholly obtained or producedWhere only one country enters into consideration in attributing origin

Substantial transformationWhere two or more countries have taken part in the production process

– Change in Tariff Classification – Regional Value Content – Technical Requirement

Product-Specific RoO(restrictiveness)

Provisions adding leniency to RoO:– De minimis– Cumulation– Self-certification– Roll-up or absorption principle

Provisions that may make RoO more restrictive:– Lists of operations insufficient to confer origin– Complex certification methods– Inefficient customs verification and administration

Regime-Wide RoO(facilitation)

Cheong-Cho: Analysis of “representative” FTAs / RoO

A

B

C

D

Conclusions:

East Asia RoODivergence…

Potential for SBEffects…

East Asian FTA…

Comment #1:On East Asia Divergence…

A

B

C

D

E

G

E

F

Intra-regional vs. extra-regional divergence…

A

B

C

D

E

G

E

F

Comment #2:On SB Effects in East Asia…

Aggregate effects vs. country effects…

A

B

C

D

E

G

E

F

Comment #3:On East Asia FTA…

Convergence and Region-wide FTAs…

Comment #1:On East Asia Divergence…

A

B

C

D

E

G

E

F

“within” region vs. “between” regions divergence…

Product Specific RoO: CTH / RVC / TECH Combinations

With APEC MemberRest of the World

0%

20%

40%

60%

80%

100%

NAFTAUS-

Chile

Canad

a-Chi

leChil

e-Kor

eaSA

FTAJS

EPAAFT

A

ANZCERTA

Mex

ico-E

FTAM

exico

-EU

Chile-E

UG-3

Mex

ico-C

osta

Rica

Mex

ico-B

olivia

Chile-C

ACM

Chile-M

erco

sur

US-Jo

rdan

US-Isr

ael

Bangk

okPANEURO

ECOWAS

COMESA

SADC

Gulf C

C

CTC RVC CTC+RVC CTC+RVC+TECH OTHER

within APEC(Cheong-Cho sample)

A

B

C

D

E

G

E

F

Comment #2:On SB Effects in East Asia…

Aggregate effects vs. sector effects vs. country effects…

Trade Effects of PTAs with Rules of Origin

-2

-1

0

1

2

3

PTA Effect RoO Effect Facil Effect

Do RoO Divert Trade in Intermediate Goods?

0

0.1

0.2

0.3

0.4

0.5

0.6

0.7

Chemicals Machinery TV and RadioTransmitters

Textiles Vehicles

RoO Effect Facil Effect

Trade in intermediates is very important in East Asia…

0

2

4

6

8

10

12

14

16

East Asiaand Pacific

LatinAmerican

andCaribbean

Europe andCentral Asia

Middle Eastand N. Africa

South Asia Sub-SaharnAfrica

Export share of parts and components 1980-2002

Building a computer hardisk in Thailand…

A

B

C

D

E

G

E

F

Comment #3:On East Asia FTA…

Convergence & Region-wide FTAs…

Countries’ operating in two or more RoO theaters:– Complicate firms’ supply relations– Force specialization of production to a certain market(s)

when RoO are strict– Increase transaction costs when certification methods

diverge– Particularly important for developing countries that are

often spokes to different RoO hubs

Why convergence in RoO Regimes?

Do pre-conditions exist ?

Potential for effective “cumulation”areas among existing FTAs depends on: – Degree of intra-regional tariff

elimination / sequencing…– Degree of common RoO regimes…– Potential for negotiation “regional”

cumulation regime…

What are the policy options?

Negotiate simple, non-restrictive RoO in RTAs?Regional/multilateral harmonization of RoO (Doha mandate)? Creation of a broader-single integration zones (FTAAP, AFTAA)? Promote convergence and cumulation across existing RTAs? Silver bullet: multilateral tariff liberalization?