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Rules of Origin in Preferential Trading Arrangements:
Is All Well with the Spaghetti Bowl in the Americas?
Preferential trading arrangements (PTAs) have proliferated spectacularly over the past decade around the world.1 The number of PTAs in force soared from fifty in 1990 to some 230 by the end of 2004, and it is expected to rise to 300 in the course of 2005. Governing more than a third of global trade, PTAs have sparked intense policy interest at the multilateral level. They are among the top priorities of the ongoing Doha Round of trade negotiations of the World Trade Organization (WTO).2
The Western Hemisphere has been a major source for the expansion of the world's PTAs. The region's countries have signed some forty free trade agreements with each other or with extrahemispheric parties since 1990. Mexico and Chile have been particularly prolific integrators: Mexico has signed twelve PTAs and Chile seven.3 While the bulk of their agreements are with partners in the Americas, both countries have also integrated with European and Asian economies. For its part, the United States has concluded four free trade agreements in the Americas and six with [End Page 63] nonhemispheric partners, and it is proceeding toward another six. In total, the countries of the Americas are negotiating or opening negotiations for more than two dozen new PTAs. Prominent ongoing initiatives include the Free Trade Area of the Americas (FTAA) talks encompassing thirty-four countries and the negations between the Southern Common Market (Mercosur) and the European Union aimed at connecting the world's two largest customs unions.
The hemispheric PTA spree has forged a veritable spaghetti bowl of multiple and often overlapping agreements (figure 1). The various rules included in each PTA—such as standards, safeguards, government procurement, and investment—entangle the bowl further. While PTAs can generate important economic benefits, the PTA spaghetti bowl carries two risks. First, the manifold trade rules of PTAs can introduce policy frictions that increase the costs of trading. Each new rule in each PTA represents a new policy for firms to consider in their export, outsourcing, and investment decisions. Each also has legal, administrative, and economic implications for the PTA partner countries. Not all PTA rules necessarily work to expand trade from its pre-PTA levels. Second, differences in rules across PTAs can translate into transaction costs to countries dealing on two or more [End Page 64] PTA fronts simultaneously. This is a particular consideration in the Americas, where each country belongs to an average of four PTAs.4
Rules of origin are a key market access rule (or discipline, in the jargon of trade negotiators) in PTAs. Rules of origin are the crucial gatekeepers of commerce: a product shipped from an exporting PTA member must meet the corresponding rule of origin to receive preferential treatment from the importing member. Rules of origin epitomize the hemisphere's policy problem: a growing number of the region's PTAs carry complex and restrictive rules of origin, and the many rules-of-origin regimes differ from each other. Consequently, the rules-of-origin spaghetti could hold back the trade-creating potential of the hard-earned PTAs.
This paper presents an in-depth diagnosis of rules-of-origin regimes in the Americas and offers policy recommendations for the region to counter the potential negative effects of rules of origin. We hope to make two contributions: to deepen understanding of the types and effects of rules of origin used in Western Hemisphere PTAs, and to add rigor to the policy debate on the implications of PTAs to the multilateral trading system.5
The paper is organized in four parts. The first part surveys the state and latest trends in the rules-of-origin regimes in the Americas. The next section summarizes the recent research on the political economy reasons behind the choice...