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

Jose Anson, Universal Postal Union
Olivier Cadot, HEC, Université de Lausanne
Antoni Estevadeordal, Inter-American Development Bank
Jaime de Melo, Université de Genčve
Akiko Suwa-Eisenmann, INRA
Bolormaa Tumurchudur Klok, HEC, Université de Lausanne

Abstract

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, we find average compliance costs around 6% in ad valorem equivalent, undoing the tariff preference (4% on average) for a large number of tariff lines. Administrative costs amount to 47% of the preference margin. 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.