The Political Origins of Rules of Origin

• In Event: Firms in Trade with China

Abstract

Rules of Origin (RoO) have emerged as one of the primary policy instruments amid deepening global value chains. Despite their significance, the scholarly understanding of how RoO interact with other trade policies remains limited. We propose a theory that elucidates the political origins of RoO. Specifically, we argue that RoO enable governments to concurrently appeal to three distinct political constituencies by: (1) protecting downstream producers, (2) providing export subsidies for upstream producers, and (3) reinforcing the existing global production networks shaped by multinational corporations (MNCs). To empirically test this argument, we construct the first comprehensive dataset on RoO, encompassing 121 PTAs at the product level among 85 countries. We find that stringent RoO considerably attenuate the effects of trade liberalization and disrupt existing global production networks, especially for substitutable goods. By merging our data with Chinese Customs Data (2000-2013), we also demonstrate that MNCs can shape the formulation of RoO to maintain and expand their global production networks.

Authors

• In Song Kim, Massachusetts Institute of Technology

• Hao Zhang, Princeton University