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RoO for PTAs: Implications for AFTA of US and EU Regimes

Jaime de Melo: demelo@ecopo.unige.ch. RoO for PTAs: Implications for AFTA of US and EU Regimes. O. Cadot, J. de Melo, A. Portugal-Perez. WB-BFA Workshop, Hainan, June 26-27. Outline. EU (ACP and GSP) and US (Mexico under NAFTA) RoO → a maze of RoO

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RoO for PTAs: Implications for AFTA of US and EU Regimes

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  1. Jaime de Melo: demelo@ecopo.unige.ch RoO for PTAs: Implications for AFTA of US and EU Regimes O. Cadot, J. de Melo, A. Portugal-Perez WB-BFA Workshop, Hainan, June 26-27

  2. Outline • EU (ACP and GSP) and US (Mexico under NAFTA) RoO → a maze of RoO • Preferences & utilization rates (EU-US) • AFTA utilization rates: Why so low? • Economics of RoO (summary of evidence) • « New » results for AFTA • Conclusions

  3. …The Maze(classification of PSRO under NAFTA and PANEURO at HS-6 level(Also see annex table 1 for comparison across PTAs)

  4. Preferences & utilization rates

  5. EU-US utilization rates (I) • Certainly not low by AFTA stds (see below) • Average pref. Margins =4.5% for NAFTA, 2.4% for GSP, 4.6% for ACP (positive tariff line only). • For EU 62% of GSP-eligible trade at zero tariffs and 80% for ACP. • …but T&A utilization rates (ui) are rather low. • Paper argues that strong evidence that RoO are the culprit.

  6. EU-US utilization rates (I)(pref. Margins, util rates(#tariff lines)

  7. Textiles & Apparel(ACP tolerance=15%, GSP=0%)

  8. AFTA RoO: Why so low (I) • EU has over 500 PSRO….and is considering moving to a value content (VC) only criterion to meet the sufficient processing requirement • AFTA currently has a VC threshold = VNOM<=60% FOB price with close to full cumulation (last stage of processing has to be undertaken in country) • …very low util. Rates 5%-10% for highest user (Philippines) in late 90s

  9. AFTA RoO: Why so low (II) • Intra regional trade mostly in intermediates « factory Asia » as Japan and Korea successively outsource labor-intensive stages • Intra-regional trade in computer/machinery (HS-84) and electrical equipment (HS-85) where preferential market access is low • …with trade in final products mostly to RoW & given that tariff on intms. are always lower • → preferential market access irrelevant

  10. AFTA RoO: Why so low (III) • Paper argues that with new regionalism in AFTA preferential market access will become more relevant • Protectionist pressures will most likely be felt in RoO set-up (the security valve par excellence outside the scope of WTS) • VA=10%;VNOM=40% in mfg.►VO=64% • VA=10%;VNOM=60% in mfg.►VO=46% • …so RoO could be binding…

  11. Economics of RoO: basics (I) • Details on set up in the paper Unit costs= Undistorted+ distorted+ Adminis+rent sharing Total Unit costs = Undistorted + compliance costs

  12. Economics of RoO: Quantification? • Huge heterogeneity (more at HS-6 level?) • Limited data (=utilization rates at HS-6 level +Yes or No for each PSRO + variation in VC where applicable (often VC is not the only criterion when it is used…) • …crazy to try and quantify??? • Yes, but here is a summary…

  13. Economics of RoO: Evidence (I) • R-index at HS-6 level(1<Ri<7). Ordinal index based on simple obs. rule (like an ERP index) • Non-parametric (based on Ri) • Econometric (reduced-form estimates) • Simulations (based on models with well-accepted behavior---see the paper)

  14. Economics of RoO: Evidence (II)Ri=1 (not restrictive)=7(very restrictive)

  15. Economics of RoO: Evidence (III) • Non-parametric based on revealed preference and R-index values (see discussion in text & table 4 –perhaps 3% for administrative for admin. Costs). • …but difficult to be confident about these results since preferential status often asked when preferential margin is zero (i.e. zero tariffs)

  16. Economics of RoO: Evidence (IV) • Strong and consistent results across NAFTA (Mexican exporters to US); EU (GSP & ACP). • Utilization rates lower when multiple criteria (after controlling for preferential rates); technical requirements associated with high compliance costs…which are easily manipulated by special interests (see discussion in paper on evidence about market power in T&A and pass-trough under NAFTA)

  17. New Results for AFTA(EU data;RVC is only criterion)RVC=min.origin. value; tariff lines;util rate; preference margin)

  18. New Results for AFTA (II)(see annex table 2 for details)(effects on util. Rates –percentage points)

  19. Conclusions • Scientific approach to RoO may work (has worked in the past on trade incentives in the Region)…but formidable task as recognized by Mr. Qiang • EU & US. « Business owned » rather than «business friendly» ? • Uniform VC content by-passes PRSO thereby avoiding capture by special interests….but not easy to implement for small firms in Low-income partners • Keep it simple and avoid opening the Pandora’s box of technical requirements, exceptions and other PSRO that are likely to be captured by special interests in the high income partners (but Asia could be an exception… again and muster the collective action necessary to avoid the US-EU outcome?) • …but best strategy of all is to make RoO irrelevant by continuing to reduce tariff barriers while avoiding tariff peaks (extending preferences to many trading partners lowers the stakes as value of preferences is reduced)

  20. ANNEX1.Description of RoO under PTAs 2. Econometric Estimation3. Results for AFTA

  21. Econometric Approach • Remember huge heterogeneity in data… Hold your breadth and estimate

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