The Korean Economic Review
The Effects of Preferential Rules of Origin on Trade Flows
Honggue Lee (Konkuk University)Year 2013Vol. 29No. 2
This paper estimates the effects of preferential rules of origin (PROOs) on trade flows,using a “treatment” effect model. Exporters meet the content rules for the benefit of trade preferences, which is similar to “self-selection” into treatment. The IV estimation of the treatment effect using OECD data shows that PROOs negatively affect the trade in intermediate inputs and final goods. Estimation results confirm that PROOs are the protectionist instrument, inducing hidden protection through an “effect of tariffs” on imported intermediate inputs, and causing an indirect protective effect on final goods. Since preferential treatments of FTAs are conditional on compliance with PROOs, the effects of FTAs and PROOs move in the opposite direction. The net change in intermediate inputs trade will be smaller than what it would have been without PROOs. Given an inverse relationship between PROOs and intermediate inputs trade, the presence of PROOs will adversely affect final goods trade because a decrease in intermediate inputs trade distorts final goods trade.