The World Bank Research Observer Advance Access published online on October 4, 2007
The World Bank Research Observer, doi:10.1093/wbro/lkm010
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Why OECD Countries Should Reform Rules of Origin
With preferential trade agreements on the rise worldwide rules of origin—which are necessary to prevent trade deflection—are attracting increasing attention. At the same time, preference erosion for Generalized System of Preferences (GSP) recipients is increasing resistance to further multilateral negotiations. Drawing on different approaches, this article shows that the current system of rules of origin that is used by the European Union and the United States in preferential trade agreements (including the GSP) and that is similar to systems used by other Organisation for Economic Co-operation and Development countries should be drastically simplified if developed economies really want to help developing economies integrate into the world trading system. In addition to diverting resources for administrative tasks, current rules of origin carry significant compliance costs. More fundamentally, it is becoming increasingly clear that they are often been designed to force developing economies to buy inefficient intermediate products from developed economies to "pay for" preferential access for the final product. The evidence also suggests that a significant share of the rents associated with market access (net of rules of origin compliance costs) is captured by developed economies. Finally, the restrictiveness of rules of origin is found to be beyond the levels that would be justified to prevent trade deflection, suggesting a capture by special interest groups. The article outlines some alternative paths to reforms.
Olivier Cadot is Professor of Economics at the University of Lausanne, associated scholar at Centre d'Etudes et de Recherches sur le Développement International (CERDI), and fellow at the Centre for Economic Policy Research (CEPR); his email address is olivier.cadot@unil.ch. Jaime de Melo (corresponding author) is Professor of Economics at the University of Geneva, associated scholar at CERDI, and fellow at CEPR; his email address is demelo@ecopo.unige.ch. The authors thank Paul Brenton and Marcelo Olarreaga for many useful suggestions and their colleagues and co-authors Céline Carrère, Antoni Estevadeordal, Alberto Portugal-Perez, Akiko Suwa-Eisenmann, and Bolormaa Tumurchudur for permission to draw on joint work. They also thank three referees for comments on a previous draft.