International trade law, political economy and rules of origin: A plea for a reform of the WTO regime on rules of origin

Journal of World Trade

Volumn 36, Issue 2, 2002, Pages 171-188

  Hirsch, Moshe ^a  

^a HEBREW UNIVERSITY OF JERUSALEM   (Israel)

Author keywords

[No Author keywords available]

Indexed keywords

INTERNATIONAL TRADE; POLITICAL ECONOMY; REGULATORY APPROACH;

EID: 26044472464     PISSN: 10116702     EISSN: None     Source Type: Journal    
DOI: 10.1023/A:1015558824815     Document Type: Review

References (146)

1. Two synonymous terms are widely employed in the literature to describe the branch of political economy that deals with international trade: "political economy of trade policy" and "political economy of international trade". This article employs these two terms interchangeably.
2. For various definitions of political economy and its evolution as a distinct discipline, see Peter Groennewegen, Political Economy and Economics, in John Eatwell, Murray Milgate and Peter Newman (eds), The New Palgrave Dictionary of Economics, Vol. III (London, Macmillan, 1987), p. 904.
3. For a general introduction to the political economy of trade policy, see Robert E. Baldwin, The Political Economy of US Import Policy (Cambridge, MA, MIT Press, 1985), p. 3;
4. Arye L. Hillman, The Political Economy of Protection (Chur, Hardwood Academic, 1989), p. 5.
5. See George T. Crane and Abla Amawi, The Theoretical Evolution of Political Economy (Oxford, Oxford University Press, 1991), pp. 3-5;
6. Roger Tooze, "International Political Economy in the Age of Globalization", in John Baylis and Steve Smith (eds), The Globalization of World Politics (Oxford, Oxford University Press, 1997), pp. 212, 215.
7. See also David N. Balaam and Michael Veseth, International Political Economy (2nd edn, Englewood Cliffs, NJ, Prentice-Hall, 2000), pp. 4-6.
8. Hillman, as note 2 above, pp. 1-3;
9. Ethan B. Kapstein, Winners and Losers in the Global Economy, 54 International Organization (2000), 359, 364.
10. Alan Sykes, Comparative Advantage and the Normative Economics of International Trade Policies, 1 Journal of International Economic Law (1998), 49, 57-63.
11. Wolfang F. Stopler and Paul A. Samuelson, Protection and Real Wages, 9 Review of Economic Studies (1941-42), 58.
12. Stopler and Samuelson, ibid.;
13. Hillman, as note 2 above, pp. 8-10;
14. Helen V. Milner, The Political Economy of International Trade, 2 Annual Review of Political Sciences (1999), 91, 95.
15. This prediction is dependent upon "factor specificity" (mobility or lack of mobility of the factors of production among sectors);
16. see, in detail, James E. Alt, Jeffry Frieden, Michael J. Gilligan, Dani Rodrik and Ronald Rogowski, The Political Economy of International Trade: Enduring Puzzles and Agenda for Inquiry, 29 Comparative Political Studies (1996), 689, 697-700.
17. See, e.g., Peter Moser, The Political Economy of the GATT (Grusch, Verlag Ruegger, 1990), pp. 19-23.
18. Dani Rodrik, "Political Economy of Trade Policy", in Gene M. Grossman and Kenneth Rogoff (eds), Handbook of International Economics, Vol. III (Amsterdam, Elsevier, 1995), pp. 1457, 1459.
19. These preferences are derived from the expected outcomes of each alternative trade policy for each domestic group; Rodrik, as note 9 above, p. 1459..
20. This stage requires an analysis of the relevant political organization and the forms of political influence (e.g., lobbying, campaign contributions, etc.); Rodrik, as note 9 above, pp. 1459-60.
21. Rodrik, as note 9 above, p. 1460.
22. On the implications of certain institutional features upon trade policy, see Edward D. Mansfield and Marc L. Bush, The Political Economy of Nontariff Barriers: A Cross-National Analysis, 49 International Organization (1995), 723, 729-731;
23. H. Richard Friman, "Rocks, Hard Places, and the New Protectionism: Textile Trade Policy Choices in the United States and Japan, 42 International Organization (1988), 689, 695-698.
24. For an in-depth analysis of the implications of the delegation of trade policy authority by the US Congress to the executive branch, see Michael J. Gilligan, Empowering Exporters: Reciprocity, Delegation, and Collective Action in American Trade Policy (Ann Arbor, MI, University of Michigan Press, 2000), pp. 35-57.
25. On the role of international factors in the shaping of trade policy, see, e.g., Friman, as note 13 above, pp. 698-699;
26. Vinod K. Aggarwal, Robert O. Keohane, and David B. Yoffie, The Dynamics of Negotiated Protectionism, 81 American Political Science Review (1987), 345, 348.
27. 'Strategic trade' literature is focused on the international variables of trade policy: see, e.g., Paul R Krugman (ed.), Strategic Trade Policy and the International Economics (Cambridge, MA, MIT Press, 1986), p. 5;
28. James A. Brander, "Strategic Trade Policy", in Gene M. Grossman and Kenneth Rogoff (eds), Handbook of International Economics, Vol. III (Amsterdam, Elsevier, 1995), p. 1395;
29. Stephen Greenwold, Strategic Interest and International Political Economy, 4 New Political Economy 1 (1997), 97.
30. See, for instance, the statement made by Rodrik: "While the manner in which political influence is exercised differs across models, the conclusion in common is: trade is not free because politically-influential groups can be made better off by policy intervention in trade." Rodrik, as note 9 above, p. 1470;
31. see also p. 1476.
32. For a concise survey of the existing literature on this subject, see Milner, as note 7 above, pp. 95-107;
33. Rodrik, as note 9 above, pp. 1463-1470.
34. For a broader survey, see Hillman, as note 2 above, pp. 24-72;
35. Baldwin, as note 2 above, pp. 6-32.
36. See, e.g., Jagdish Bhagwati and Douglas A. Irwin, "The Return of the Reciprocitarians: U.S. Trade Policy Today", in Jagdish Bhagwati (ed.), Political Economy and International Economics (Cambridge, MA, MIT Press, 1991), pp. 84, 102;
37. Jagdish Bhagwati, Protectionism (Cambridge, MA, MIT Press, 1988), p. 72;
38. Gilligan, as note 13 above, pp. 3-4.
39. For a survey of other explanations, see Milner, as note 7 above.
40. On the Prisoners' Dilemma, see James D. Morrow, Game Theory for Political Scientists (Princeton, NJ, Princeton University Press, 1994), pp. 78-81, 262-268.
41. On the application of the Prisoners' Dilemma to international relations and international law, see Moshe Hirsch, Game Theory, International Law, and Environmental Cooperation in the Middle East, 27 Denver Journal of International Law & Policy (1999), 75, 88, 109-115;
42. Kenneth W Abbott, Modern International Relations Theory: A Prospectus for International Lawyers, 14 Yale Journal of International Law (1989), 360-362;
43. Glenn H. Snyder, Prisoners' Dilemma and Chicken Models in International Politics, 15 International Studies Quarterly (1971), 66.
44. Bernard Hoekman and Michel Kostecki, The Political Economy of the World Trading System (Oxford, Oxford University Press, 1995), p. 21;
45. Robert W Staiger, "International Rules and Institutions for Trade Policy", in Gene M. Grossman and Kenneth Rogoff (eds), Handbook of International Economics, Vol. III (Amsterdam, Elsevier, 1995), pp. 1495, 1511-1515.
46. See in detail on international trade and the Prisoners' Dilemma, John A.C. Conybeare, Public Goods, Prisoners' Dilemmas and the International Political Economy, 28 International Studies Quarterly (1984), 5, 10-14.
47. On the importance of reciprocal measures as a means of solving the Prisoners' Dilemma and other collective action problems, see Robert Axelord, The Evolution of Cooperation (New York, Basic Books, 1984), pp. 27-54;
48. Martin Patchen, Strategies for Eliciting Cooperation from an Adversary, 31 Journal of Conflict Resolution (1987), 171-181;
49. Todd Sandler, Collective Action: Theory and Applications (Ann Arbor, MI, University of Michigan Press, 1992), p. 83.
50. See, e.g., Moser, as note 8 above, pp. 25, 39;
51. John MacMillnn, Game Theory in International Economics (Chur, Hardwood Academic, 1986), pp. 31-33;
52. Hoekman and Kostecki, as note 20 above, pp. 27-30.
53. For an analysis of the GATT/WTO system from this perspective, see Bhagwati, Protectionism, as note 17 above, pp. 35-37, 40;
54. Hillman, as note 2 above, pp. 121-123.
55. ROO function as a differentiating mechanism in preferential arrangements, but it should be noted that these arrangements might operate in both directions: providing for either trade preferences (e.g., tariff reduction) or restrictive measures (e.g., quantitative restrictions). Though the role of determining whether a particular product qualifies for a certain trade preference is more noticeable, the rationale underlying both roles is the same.
56. ROO have an additional and distinctive role in free trade areas (FTAs). ROO are essential to maintaining FTAs with different external tariffs towards non-FTA members. In the absence of ROO, imported products from non-FTA countries would enter through the country with the lowest tariff and be re-exported to the other FTA members. After a certain period, such a pattern of trade flow is expected to exert pressure upon the states with the higher tariff rate to lower their tariff rate, nearing that of the state with lowest duty. Such a process is likely to put pressure on the FTA members to adopt the same external tariff rates, i.e., to form a customs union. The operation of ROO averts this undesirable development by not allowing products manufactured in non-FTA countries to enjoy duty-free movement among the FTA members. See on this feature, Kala Krishna and Anne Krueger, "Implementing Free Trade Areas: Rules of Origin and Hidden Protection", in Jim Levinson, Alan V. Deardroff, and Robert M. Stern (eds), New Directions in International Trade (Ann Arbor, MI, University of Michigan Press, 1995), pp. 149, 150-151.
57. On this trend, see Jacques H.J. Bourgeois, "Rules of Origin: An Introduction", in Edwin Vermulst, Paul Waer and Jacques Bourgois (eds), Rules of Origin in International Trade (Ann Arbor, MI, University of Michigan Press, 1994), pp. 1, 4-5.
58. The term "last substantial process" is often used in non-preferential contexts (e.g., the WTO Agreement on Rules of Origin) and the term "sufficient working or processing" is widely used in preferential agreements; see, e.g., with regard to EC preferential agreements, Paul Waer, "European Community Rules of Origin", in Edwin Vermulst, Paul Waer, and Jacques Bourgois (eds), Rules of Origin in International Trade (Ann Arbor, MI, University of Michigan Press, 1994), pp. 85, 146.
59. See on these tests in detail, John H. Jackson, The World Trading System (2nd edn, Cambridge, MA, MIT Press, 1997), pp. 167-169;
60. Edwin A. Vermulst, Rules of Origin as Commercial Policy Instruments - Revisited, 26 J.W.T. 6 (December 1992), 61, 63-74;
61. Joseph A. LaNasa III, Rules of Origin and the Uruguay Round's Effectiveness in Harmonizing and Regulating Them, 90 American Journal of International Law (1996), 625, 629-636.
62. It should be emphasized here that global agreements (such as the WTO agreements) are also considered as "preferential arrangements" in this sense, since trade preferences included in such agreements are accorded only to products manufactured in the contracting states.
63. This issue is also one of the essential preconditions to the establishment of FTAs or customs unions under Article XXIV(4) of the GATT; see, e.g., Jackson, as note 27 above, pp. 65-67; on the economic rationale for Article XXIV, see Jagdish Bhagwati, "Regionalism and Multilateralism: An Overview", in Jaime de Melo and Arvind Panagariya (eds), New Dimensions in Regional Integration (Cambridge, Cambridge University Press, 1995), pp. 22, 25-28.
64. See, e.g., E. Ivan Kingston, "The Economics of Rules of Origin", in Edwin Vermulst, Paul Waer and Jacques Bourgois (eds), Rules of Origin in International Trade (Ann Arbor, MI, University of Michigan Press, 1994), p. 7.
65. See, e.g., the statement made by Lawrence: "The major abuses perpetrated by the emerging regional arrangements relate to their use of rules of origin and antidumping provisions." Robert Z. Lawrence, "Regionalism and the WTO: Should the Rules be Changed?", in Jeffrey J. Schott (ed.), The World Trading System: Challenges Ahead (Washington, DC, Institute of International Economics, 1996), pp. 41, 52.
66. The terms "local" and "domestic" refer here to the territories of the contracting states, and "foreign" refers to the territories of non-contracting states. This terminology is based on the assumption that the preferential arrangements include rules of either "bilateral cumulation" or "multilateral cumulation". Cumulation rules allow each party to the arrangement to use factors of production originating in the territories of the other contracting parties without infringing upon the ROO. See, e.g., Article 404 of the North American Free Trade Agreement (NAFTA), 32 International Legal Materials (1993), 289.
67. In the absence of such cumulation rules, the above effects of ROO operate only with regard to the territory of each contracting party. For a detailed analysis of various techniques of cumulation, see Moshe Hirsch, Asymmetric Factor Endowments, Progressive Rules of Origin, and Commercial Cooperation in the Middle East (Working Paper, Kohl Center for European Studies, The Hebrew University, 1998), pp. 15-22.
68. On the cumulation rules in the EC preferential agreements, see Hans-Joachim Priess and Ralph Pethke, The Pan European Rules of Origin: The Beginning of a New Era in European Free Trade, 34 Common Market Law Review (1997), 772, 782-786;
69. Nicholas A. Zaimis, EC Rules of Origin (London, Chancery Law Publishing, 1992), pp. 175-214.
70. On this impact of ROO, and its inefficient consequences (in terms of reallocation of resources) in detail, see Moshe Hirsch, The Asymmetric Incidence of Rules of Origin: Will Progressive and Cumulation Rules Resolve the Problem?, 32 J.W.T. 4 (August 1998), 41, 44-45.
71. The above negative effects of ROO upon foreign suppliers are similar to those that are generally generated to third parties by the establishment of preferential arrangements in general. This is the well-known effect of "trade diversion" in favour of preferential arrangements' parties. It should be emphasized that the extent of the diversion in favour of the contracting parties is dependent, inter alia, on the level of restrictiveness of the ROO included in a particular preferential arrangement. Thus, excessive ROO increase the negative impacts of preferential agreements for manufacturers located in the territories of third parties. For an analysis of the economic effects of preferential arrangements for third parties, see James C. Ingram and Robert M. Dunn, International Economics (3rd edn, Wiley & Sons, 1993), pp. 163-169;
72. Jagdish Bhagwati and Arvind Panagariya, The Economics of Preferential Trade Agreements (Washington, DC, AEI Press, 1996), p. 7.
73. For the impact of preferential trade arrangements on the world trading system, see Michael J. Trebilcock and Robert House, The Regulation of International Trade (2nd edn, London, Routledge, 1999), pp. 129-134.
74. In such a case, however, other NTBs may still be relevant.
75. These calculations should also take into account the costs of transferring production in the case of shifting the production line into the preferential area, and transportation costs in the case of production outside the preferential area.
76. Here it is also necessary to examine the administrative costs involved in compliance with ROO (e.g., the costs of providing appropriate documentation to determine origin). Krishna and Krueger, as note 24 above, p. 157, n. 16;
77. Waer, as note 26 above, p. 158;
78. Stephenson and James, Rules of Origin and the Asia-Pacific Economic Cooperation, 29 J.W.T. 2 (April 1995), 77, 89.
79. David Palmeter, "Rules of Origin in Regional Trade Agreements", in Paul Demaret, Jean-Francois Bellis and Gonzalo Garcia Jimenez (eds), Regionalism and Multilateralism After the Uruguay Round (Brussels, European Inter-University Press, 1997), pp. 341, 343-345.
80. Joseph A. LaNasa III, Rules of Origin under the North American Free Trade Agreement: A Substantial Transformation into Objectively Transparent Protectionism, 34 Harvard International Law Journal (1993), 381, 397-399.
81. Vermulst, as note 27 above, pp. 66-67;
82. Anna Murphy, The European Community and the International Trading System, Vol. II (Brussels, Center for European Policy Studies, 1990), pp. 50-51.
83. Murphy, ibid., pp. 49-50;
84. Jeri Jensen-Moran, Trade Battles as Investment Wars: The Coming Rules of Origin Debate, 19 The Washingtonian Quarterly (1995), 239, 242-243;
85. Rene Schowk, US-EC Relations in the: Post-Cold War Era: Conflict, or Partnership (Boulder, CO, Westview Press, 1991), pp. 101-102;
86. Norio Koniuro, "International Harmonization of Rules of Origin", in Philip Ruttley, Iain MacVay and Carol George (eds), The WTO and International Trade Regulation (London, Cameron May, 1998), p. 86.
87. Jensen-Moran, as note 42 above, p. 244.
88. See the impressive figures cited in Jensen-Moran, ibid., p. 245.
89. Antoni Estevadeordal, Negotiating Preferential Market Access: The Case of the North American Free Trade Agreement, 34 J.W.T. 1 (February 2000), 141, 151.
90. Antoni Estevadeordal, 34 J.W.T., Ibid, at 160-161.
91. The author concludes at p. 161: "In other words, borrowing the language of the endogenous protection literature, one could conclude that the same forces that push for tariff protection also push for more restrictive ROO."
92. Bhagwati, Protectionism, as note 17 above, p. 53;
93. see also Mansfield and Bush, as note 13 above, p. 734.
94. The authors of the study found considerable evidence of an inverse relationship between the employment of tariffs and NTBs. Consequently, they concluded that "tariffs and NTBs seem to be substitutes"; Mansfield and Bush, as note 13 above, pp. 739-740.
95. Hillman, as note 2 above, pp. 73-74.
96. Ibid.
97. Ibid.
98. As cited in John P. Simpson, North American Free Trade Agreement - Rules of Origin, 28 J.W.T. 1 (February 1994), 33.
99. Agreement on Rules of Origin and the Common Declaration with regard to Preferential Rules of Origin, in The Results of the Uruguay Round of Multilateral Trade Negotiations (Geneva, GATT, 1994), p. 241.
100. On the 1994 Agreement on Rules of Origin, see Edurne Navarro Varona, "Rules of Origin in the GATT", in Edwin Vermulst, Paul Waer and Jacques Bourgeois (eds), Rules of Origin in International Trade (Ann Arbor, MI, University of Michigan Press, 1994), pp. 355, 359-363;
101. LaNasa, Rules of Origin and the Uruguay Round, as note 27 above, pp. 635-639;
102. Trebilcock and House, as note 34 above, pp. 127-128.
103. On the work of the WTO Committee on ROO following the conclusion of the 1994 Agreement, see Philippe G. Nell, WTO Negotiations on the Harmonization of Rules or Origin: A First Critical Appraisal, 33 J.W.T. 3 (June 1999), 45.
104. See Article 1(1) of the Agreement on Rules of Origin, ibid.;
105. Komuro, as note 41 above, pp. 100-108.
106. Article 2(b) of the Agreement on Rules of Origin provides that the contracting parties are not allowed to use "their rules of origin ... as instruments to pursue trade objectives". And Article 2(c) provides that the member states are not permitted to use ROO to "create restrictive, distorting, or disruptive effects on international trade".
107. The above prohibition (cited in the former note) is not included in the Common Declaration with Regard to the Preferential Rules of Origin.
108. Hoekman and Kostecki, as note 20 above, p. 104.
109. See, e.g., Harry P. Bowen, Abraham Hollander and Jean-Marie Viaene, Applied International Trade Analysis (London, Macmillan, 1998), pp. 4-5, 86-89;
110. Ingram and Dunn, as note 34 above, pp. 37-72.
111. See Section V.
112. See Section III.
113. See Section V.
114. See in detail on this impact of ROO, Hirsch, The Asymmetric Incidence of ROO, as note 33 above, p. 44.
115. Revealing this information may in itself constitute a trigger to the building of some pressure upon policy-makers to reduce the extent of protection accorded to a particular sector.
116. See Section II.
117. Articles IV, V and Annex 5 of the 1994 WTO Agreement on Trade in Agricultural Products, in The Results of the Uruguay Round of Multilateral Trade Negotiations (Geneva, GATT, 1994), p. 39.
118. On this agreement, see Trebilcock and House, as note 34 above, pp. 259-264.
119. See, e.g., LaNasa, as note 27 above, pp. 632-633.
120. See, e.g., Palmeter, as note 38 above, pp. 344-347.
121. See, e.g., Palmeter, as note 38 above, p. 347, and the examples described therein.
122. This conclusion does not rule out any resort to the Harmonized System for the purposes of origin determination. One of the main advantages of the tariff-shift test is that it is based upon the Harmonized System, which provides an almost universal framework for the determination of origin in international trade. It is important to note, however, that trade agreements that expressly adopt the tariff-shift test as the primary method to determine origin (such as NAFTA and the EEA) employ, in reality, the local content test in numerous cases. Consequently, it is possible to employ the Harmonized System as an overall framework to organize the numerous origin requirements. Still, the analysis made in the text above directs us to the conclusion that it is highly desirable that the concrete origin requirements, included in the Harmonized System or in any other framework, employ the local content test.
123. See the discussion at the first part of Section VI.
124. See the surveys in Vermulst, as note 26 above, pp. 82-86;
125. Waer, as note 25 above, pp. 149-151;
126. Stephenson and James, as note 36 above, pp. 85-87;
127. Palmeter, as note 37 above, pp. 349-351.
128. See also, LaNasa, as note 38 above, pp. 399-400;
129. Tim McNamara and Edwin Vermulst, Special Trade Law Issues in the EC for Assembly Products, 28 J.W.T. 4 (August 1994), 83, 87-89;
130. William E. James, APEC and Preferential Rules of Origin: Stumbling Blocks for Liberalization of Trade?, 31 J.W.T. 3 (June 1993), 113, 126-127;
131. Zaimis, as note 31 above, pp 43-45;
132. Komuro, as note 40 above, pp. 88-98;
133. Allan S. Galper, Restructuring Rules of Origin in the US-Israel Free Trade Agreement, 19 Fordham International Law Journal (1996), 2028, 2042-2043, 2055-2067.
134. The rate of 62.5 percent is applied to certain automobiles under NAFTA and is considered "highly restrictive";
135. LaNasa, as note 26 above, p. 399;
136. on the (protectionist) process that led to the establishment of this rule, see pp. 399-402.
137. The 35 percent rate is provided for in the 1985 Israel-US FTA, in various US assistance programs (e.g., the GSP and Caribbean Initiative Basin), and in South Korea's legislation; Galper, as note 69 above, pp. 2055-2058, 2065-2067;
138. Vermulst, as note 26 above, p. 88;
139. Komuro, as note 40 above, p. 98.
140. LaNasa, as note 26 above, pp. 633-634;
141. Stephenson and James, as note 36 above, pp. 85-87;
142. Zaimis, as note 31 above, p. 46.
143. For an in-depth analysis of the asymmetric impact of ROO, see Hirsch, as note 31 above, p. 45.
144. The size of the factor pool available to each party is not easily measurable. Still, the existence of a substantial gap is noticeable in numerous settings (although not precisely measurable). This is the case, for instance, with regard to trade agreements between most states and the European Community or the US. For a comprehensive analysis of the measurement and impact of factor endowments upon patterns of trade, see Edward E. Leamer, Sources of International Comparative Advantage: Theory and Evidence (Cambridge, MA, MIT Press, 1984), pp. 90-94, 220-236;
145. Edward E. Learner, "Measures of Openness", in Robert E. Baldwin (ed.), Trade Policy Issues and Empirical Analysis (Chicago, University of Chicago Press, 1988), pp. 147, 179-199;
146. H. Bowen, E. Leamer and L. Sveikauskaus, Multicountry, Multifactor Tests of the Factor Abundance Theory, 77 American Economic Review (1987), 791, 793-794.