Harmonizing preferential rules of origin regimes around the world

The proliferation of regional trade agreements (RTAs) around the world has focused policy attention to preferential rules of origin (ROOs). The concerns voiced over ROOs are two-fold: restrictiveness and divergence. Restrictive ROOs can introduce undue barriers to trade between RTA members and non-members, thus dampening RTAs’ trade-creating potential. Divergences in ROOs across regimes can increase the transaction costs for countries and companies dealing on two or more RTA fronts simultaneously, especially when they are unable to cumulate production and inputs across agreements. These two issues are intricately linked: divergence matters more when ROOs are binding – i.e. when restrictiveness is consequential for economic decisions and affects firms’ production. Non-binding ROOs around the world would obliterate the importance of divergence.