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

A
Cheong-Cho: Analysis of
“representative” FTAs / RoO
C
B
D
FTAs considered
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

A
Cheong-Cho: Analysis of
“representative” FTAs / RoO
C
B
D
Conclusions:
East Asia RoO
Divergence…
Potential for SB
Effects…
East Asian FTA…

A
Comment #1:
On East Asia Divergence…
Intra-regional vs. extra-regional divergence…
E
D
G
C
F
B
E

A
Comment #2:
On SB Effects in East Asia…
Aggregate effects vs. country effects…
E
D
G
C
F
B
E

Comment #3:
On East Asia FTA…
Convergence and
Region-wide
FTAs…
C
D
G
E
F
B
E
A

A
Comment #1:
On East Asia Divergence…
“within” region vs. “between” regions divergence…
E
D
G
C
F
B
E

Product Specific RoO:
CTH / RVC / TECH Combinations
100% within APEC
(Cheong-Cho sample)
With APEC Member
Rest of the
World
80%
60%
40%
20%
0%
NA
A
FT
U
S-
Ch ile ada
-C hi le ile
-Ko re a
SA
FTA
JSEP
A
Can
Ch AN
T
A
AF
ZC
ERT
M ex
A A ico
-EFT
M exi co
-EU
Ch ile
-E
U xic o-C
G-
3 os ta
Ri ca
Me ivi a
A
C
M erc osu r xi co
-Bol
C hi le
-C
Ch ile
-M an
US
-J ord
US
-I sr ae l ko k
Bang
PA
N
EU
R
O
EC
A
S
OW
C
O
ME
SA
Me
SA
DC
G ul f C
C
CTC RVC CTC+RVC CTC+RVC+TECH OTHER

A
Comment #2:
On SB Effects in East Asia…
Aggregate effects vs. sector effects vs. country effects…
E
D
G
C
F
B
E

3
0
-1
-2
2
1
Trade Effects of PTAs with
Rules of Origin
PTA Effect RoO Effect Facil Effect

Do RoO Divert Trade in Intermediate Goods?
0.3
0.2
0.1
0
0.7
0.6
0.5
0.4
Chemicals Machinery TV and Radio
Transmitters
Textiles
RoO Effect Facil Effect
Vehicles

Trade in intermediates is very important in East Asia…
Export share of parts and components 1980-2002
16
14
12
6
4
2
10
8
0
East Asia and Pacific
Latin
American and
Caribbean
Europe and Middle East
Central Asia and N. Africa
South Asia Sub-Saharn
Africa

Building a computer hardisk in
Thailand…

Convergence &
Region-wide
FTAs…
C
Comment #3:
On East Asia FTA…
D
G
E
F
B
E
A

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?