Rules of origin have long been tools of trade policy for governments seeking to distinguish different foreign sources of supply of products. In Discussion Paper No. 821, Research Fellow Bernard Hoekman reviews the literature on rules of origin for products and also for producers, which has recently assumed increased importance in international agreements over liberalization of services. Increased attention to rules of origin by policy-makers and analysts reflects both the spread of regional trade agreements and some governments' attempts to increase the local processing and sourcing of intermediate components, as reflected in the trend towards tariff protection for producers of intermediate as well as final goods.

While the economic impact of preferential rules of origin on trade flows within free trade areas is limited by the tariff, their protectionist effects limit the benefits of accession, and they may be even more severe vis-à-vis third countries if users of imported intermediate inputs shift from efficient non-member to inefficient member suppliers. The successful pursuit of restrictive preferential rules of origin by import-competing intermediate goods industries in the `hub' countries of free trade areas reflects their influence over the choice of rules. Instruments of contingent protection may help them too, by reducing opposition from adversely affected users of intermediate products, to whom antidumping or similar procedures offer an `insurance' scheme.

Rules of origin for producers of services are less restrictive than those for goods, since they are more transparent and uniform across sectors. This may reflect governments' belief that foreign firms' production of services in their territories creates sufficient local value. Available empirical evidence on subsidiaries of transnational corporations tends to support this view, but recent technological changes have greatly enhanced the tradability of many services: liberal origin rules for service producers will increasingly imply liberal rules for their products and further divergence of the treatment of goods and services.

In Discussion Paper No. 822, Hoekman focuses explicitly on services to relate the draft General Agreement on Trade in Services (GATS) that has emerged from the Uruguay Round to many developing countries' pursuit of more market-oriented domestic policies since the late 1980s. They perceived liberalizing access to service markets as a potentially low-cost and effective means of improving the quality and efficiency of their domestic service sectors. This also increased their incentives to participate as a group in the Uruguay Round negotiations, which in turn enhanced the likelihood of achieving a far-reaching multilateral agreement on services.

Hoekman explores the extent to which the draft final outcome of the GATS may contribute to their pursuit of service-sector efficiency through regulatory reform and liberalization. To the extent that external forces rather than domestic pressure groups drove their liberalization-cum-privatization programmes, their credibility may be reduced, so membership in a binding multilateral agreement may bolster reform efforts by raising the cost of `backsliding'.

Many developing countries have participated actively in the Uruguay Round negotiations on services and offered several specific liberalization commitments, while many have yet to bind their tariffs in the parallel GATT negotiations. They continue to insist, however, that the draft GATS allow them to liberalize less than the industrialized countries, which appears inconsistent with their current policy trends. Moreover, developing country provisions in the GATS are options, not requirements. Governments engaged in unilateral reform or seeking to liberalize access to service markets are free to schedule their entire service sectors on accession to the GATS, but very few have offered to schedule as much as 50% even though the cost is quite small. Hoekman attributes this to inertia, the lack of resources they devote to determining the appropriate regulatory regime, and the mercantilist, reciprocal nature of the international bargaining process.

Developing Countries and the Uruguay Round Negotiations on ServicesRules of Origin for Goods and Services: Conceptual Issues and Economic Considerations
Bernard M Hoekman

Discussion Paper Nos. 821-2, October 1993 (IT)