RIETI Policy Symposium Assessing Quality and Impacts of Major FTAs March 22-23, Tokyo Comments on “Rules of Origin in Major FTAs” by Inkyo CHEONG and CHO Jungran Antoni Estevadeordal Principal Advisor Integration and Regional Programs Department Inter-American Development Bank Cheong-Cho: Analysis of “representative” FTAs / RoO FTAs considered D C B A NAFTA EU-Mexico Australia-NZ CER Japan-Singapore EPA Japan-Mexico EPA ASEAN-China FTA Korea-Mexico FTA Chile-Korea FTA Why preferential RoO ? The main justification for preferential RoO is to avoid TRADE DEFLECTION (ensure that nonmembers 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 RoO are so important? FTAs (RoO) have proliferated around the world RoO can insulate an industry from the FTA RoO can protect intermediate good producers by favoring intra-PTA supply links RoO can attract investment in strategic sectors RoO effects in the S/R different than in the L/R What are the economic impacts of RoO? • 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 Product-Specific RoO (restrictiveness) Wholly obtained or produced Where only one country enters into consideration in attributing origin Substantial transformation Where two or more countries have taken part in the production process – Change in Tariff Classification – Regional Value Content – Technical Requirement Regime-Wide RoO (facilitation) 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 Cheong-Cho: Analysis of “representative” FTAs / RoO Conclusions: D C B A East Asia RoO Divergence… Potential for SB Effects… East Asian FTA… Comment #1: On East Asia Divergence… Intra-regional vs. extra-regional divergence… E D A C G B F E Comment #2: On SB Effects in East Asia… Aggregate effects vs. country effects… E D A C G B F E Comment #3: On East Asia FTA… Convergence and Region-wide FTAs… A E D C G B F E Comment #1: On East Asia Divergence… “within” region vs. “between” regions divergence… E D A C G B F E N A F U T C S- A an C ad hi a- le C hi Chi le -K le or e SA a FT JS A E PA A A N F Z T M CE A ex R ic T o- A E M FT ex A ic oC EU hi M le ex -E ic U oC G M osta -3 ex ic Ric oa C Bo h li C ile- via hi C A le -M C M er co U su SJo r r U dan SIs r B ael an PA gk N ok E U R E O C O W C O AS M E SA SA D G C ul fC C Product Specific RoO: CTH / RVC / TECH Combinations within APEC (Cheong-Cho sample) CTC RVC With APEC Member CTC+RVC CTC+RVC+TECH Rest of the World 100% 80% 60% 40% 20% 0% OTHER Comment #2: On SB Effects in East Asia… Aggregate effects vs. sector effects vs. country effects… E D A C G B F E Trade Effects of PTAs with Rules of Origin 3 2 1 0 -1 -2 PTA Effect RoO Effect Facil Effect Do RoO Divert Trade in Intermediate Goods? 0.7 0.6 0.5 0.4 0.3 0.2 0.1 0 Chemicals Machinery TV and Radio Transmitters RoO Effect Textiles Facil Effect Vehicles Trade in intermediates is very important in East Asia… Export share of parts and components 1980-2002 16 14 12 10 8 6 4 2 0 East Asia and Pacific Latin Europe and Middle East South Asia Sub-Saharn American Central Asia and N. Africa Africa and Caribbean Building a computer hardisk in Thailand… Comment #3: On East Asia FTA… Convergence & Region-wide FTAs… A E D C G B F E Why convergence in RoO Regimes? 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 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?