Alan V. Deardorff's latest research on international trade evaluates the timely topic of rules of origins (ROOs) impact on free trade agreements (FTAs). When forming an FTA including ROOs is a necessary practice for the pairs and groups of countries entering agreements, in order to prevent exporters from outside countries bypassing one of the members' tariffs. To evaluate the effectiveness of ROOs, Deardorff presents two stylized scenarios. The scenarios demonstrate how ROOs can potentially undermine, or even reverse, the economic benefits of FTAs.
While in practice Deardorff concludes that FTAs are beneficial, this research is meant to caution those negotiating agreements about the risks of very stringent ROOs and how they can interfere with FTAs. As the United States has recently been renegotiating some trade agreements and discussing new ones, this research offers examples of the implications of the decisions of the terms of an agreement.
Abstract: This article provides three-good, three-country examples of trade in both intermediate inputs and final goods. These show the adverse effects that rules of origin (ROOs) can have, even in a world where every country has a free trade agreement (FTA) with every other country. ROOs may cause ubiquitous FTAs to yield a level of welfare, for everyone, that is worse than if there were no FTAs at all, and all trade were subject to common nondiscriminatory tariffs. Thus, the move to an ever increasing number of FTAs may be reducing world welfare.
Read “Rue the ROOs: Rules of Origin and the gains (or losses) from trade agreements” in The International Trade Journal.