Preferential Trade Agreements and the Governance of Global Value Chains: New Evidence on the Restrictiveness of Preferential Rules of Origin

This paper uses the lens of preferential Rules of Origin to analyse the governance of Global Value Chains through Preferential Trade Agreements. The number of Preferential Trade Agreements (PTAs) has mushroomed over the past decades to over 600 agreements to date, and more than two thirds of trade today takes place in intermediary goods. PTAs and Global Value Chains (GVCs) are thus phenomena that define and describe the way countries trade in the 21st century. For individual countries, PTAs are a tool to grant preferences to other members’ exports, including intermediary products, and thus alter trade flows under GVCs. Preferential Rules of Origin (ROO) play a crucial yet under-researched role in this effect of PTAs on GVCs. Under PTAs, members may charge each other’s goods and services import tariffs lower than the Most-Favoured Nation (MFN) tariff rates scheduled at the World Trade Organisation. To determine whether a given good or service stems from a PTA member or a third country, members include ROO in PTAs. When production is fragmented along a GVC a product’s origin is complex to define. ROO commonly lay down which processing needs to have occurred in a PTA member or they restrict the amount of foreign inputs permitted in a product to be deemed originating in a PTA member country. By doing so, ROO serve to prevent trade deflection and transhipment but simultaneously restrict the inputs permitted in the production of originating goods. If trade negotiators fail to reflect existing GVCs or sourcing practices, the costs of complying with ROO can outweigh the tariff concessions granted through the PTA. Because of their potential restrictiveness, ROO are often used as a trade policy tool to protect sensitive industries. While this effect has been shown in a number of case studies, the proliferation of restrictive ROO across PTAs and how this affects trade in intermediaries is little understood. This paper maps the restrictiveness of ROO and asks how this correlates with the proliferation of trade in intermediaries. By building on the Design of Trade Agreements (DESTA) database and the database on ROO by the Organisation for Economic Cooperation and Development (OECD), the paper presents findings from the most extensive database on ROO to date. First, the dataset maps both regime-wide and product-specific types of ROO and maps their prevalence across more than 600 trade agreements entered into force since 1945. Second, the paper introduces a new restrictiveness indicator to highlight how ROO restrictiveness varies across agreements and sectors. Third, a discussion of potential explanations of the variance of ROO restrictiveness across PTA feeds into the wider policy debate on whether PTAs are stepping stones or stumbling blocks to GVCs.