Overcoming Low Preference Utilization in Preferential Trade Agreements: Presumption of Origin for Small Shipments

While rules of origin (ROOs) constitute an essential element of preferential trade agreements (PTAs), recent analysis of the utilization of preferences shows that even with liberal ROOs, utilization of preferences is often low, especially by smaller exporters. This reflects the high fixed cost component of demonstrating compliance with ROOs. In order to develop options for increasing the rate of preference utilization – especially by smaller exporters that might benefit most in terms of knowledge spillovers from entering into trade – we first examine different ROOs-related explanations of low preference utilization, in particular those based on exporters’ cost-benefit calculations in relation to compliance with ROOs. Second, we analyze the implications of low preference utilization rates for competition and welfare, which we argue are negative.

To overcome the negative implications of ROOs, we propose a way to increase the welfare benefits from PTAs while also providing a stronger impetus to the integration of SMEs into regional trade than would be possible under even the most favourable ROOs regime currently in use. We label this approach the presumption of origin. It involves a presumption of compliance with ROOs for smaller commercial-scale shipments accompanied by a simple good faith attestation of origin, with use of anti-circumvention measures modelled on similar provisions in anti-dumping and countervailing duty law to address complaints and/or to investigate suspicious import surges. While some PTAs already have special regimes for small traders in place, these are so restrictive that their practical relevance is extremely limited.

Keywords: rules of origin, preferential trade agreements, trade costs, heterogeneous firms.

JEL codes: F13, F14, F15, F53

Trade and development discussion paper no. 02/2014, 30 June 2014

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