I have written previously how “rules-of-origin” (ROO) attached to so-called “free trade agreements” (FTAs) create negative efficiency impacts, which undermine the benefits of any deal:
ROOs are designed to stop imports coming from third party (non-FTA) countries via an FTA partner, in order to circumvent tariff requirements. The ROOs, which can be either based on value-added requirements (i.e. the percentage of value-added by the FTA partner) or product specific (i.e. individual rules for each individual product imported), can raise administrative costs for businesses (including complying with paperwork requirements) and custom services in administering and auditing the ROO, undermining the benefits from the FTA.
The costs associated with ROOs will be greatest where there is a large number of FTAs each with different requirements, resulting in a “spaghetti bowl effect” of increasing complexity.
Well, researchers in Europe have released a study looking at the ROOs in the NAFTA, which they have found has caused perverse efficiency impacts. From VOX:
One of the more pernicious barriers to trade in today’s world are so-called ‘rules of origin’ that should help customs officers determine a product’s origin, but often serve to raise the cost of importing…
RoO are meant to prevent trade deflection, i.e. to ensure that goods being exported at preferential rates from one FTA partner to another truly originate from the area and are not simply assembled from components originating from third countries. In practice, they prevent final good producers from choosing the most efficient input suppliers around the world, for fear of losing ‘origin status’ and the tariff preference it confers…
Our results show that NAFTA RoO on final goods led to a significant reduction in Mexican imports of intermediate goods from non-NAFTA countries…
It is well known that input tariffs are low compared to tariffs on final goods (e.g. Miroudot et al. 2009). Our analysis shows that, when accounting for the sourcing restrictions embedded in preferential trade agreements, the effective rate of protection on these goods is much higher…
Our results show that, when accounting for these sourcing restrictions, the trade diversion effect of NAFTA was much larger.
When combined with the “trade diversion” accompanying all FTAs, which arises when the importing country shifts its buying from a more efficient, lower cost country whose goods are subject to a tariff towards the less efficient and higher cost FTA partner whose goods are not subject to a tariff, we have to ask ourselves: what are FTA’s good for?
