Recent decades have witnessed two major trends in international trade. First, technological progress and falling trade barriers have led to the emergence of global value chains and to a surge in international trade in intermediate goods. Second, there has been a proliferation of free trade agreements (FTAs). Because of their preferential nature, FTAs use rules of origin (RoO) to distinguish goods originating from member countries from those originating from third countries. In this paper, we show that RoO distort trade in intermediaries. Focusing on the North American Free Trade Agreement (NAFTA), the world’s largest FTA, we construct a unique dataset that allows us to map the input-output linkages embedded in NAFTA RoO. Using a difference-in-differences approach, we find that NAFTA RoO on final goods reduced imports of intermediate goods from third countries by up to 62 percent. These murky non-tariff barriers had generally a larger impact on imports of intermediaries than the more transparent input tariffs.
How will the TPP deal with rules of origin, and what will the impact be?
Thanks to David DeRemer for the tip.
