DP4166 Rules of Origin in North-South Preferential Trading Arrangements with an Application to NAFTA

Author(s): José Anson, Olivier Cadot, Jaime de Melo, Antoni Estevadeordal, Akiko Suwa Eisenmann, Bolormaa Tumurchudur
Publication Date: December 2003
Keyword(s): FTAs, NAFTA, rules of origin
JEL(s): F10, F11, F13
Programme Areas: International Trade and Regional Economics
Link to this Page: cepr.org/active/publications/discussion_papers/dp.php?dpno=4166

All preferential trading agreements (PTAs) short of a customs union use Rules of Origin (RoO) to prevent trade deflection. RoO raise production costs and create administrative costs. This Paper argues that in the case of the recent wave of North-South PTAs, the presence of RoO virtually limits the market access that these PTAs confer to the Southern partners. In the case of NAFTA, it is estimated that up to 40% of Mexico?s preferential access to the US market in 2000 (estimated at 5%) was absorbed by RoO-related administrative costs with non-administrative costs for Mexican firms of about 3% US of import value. These findings are coherent with the view that North-South PTAs could well be viewed like a principal-agent problem in which the Southern partners are just about left on their participation constraint.