Chapter 4. Estimating the Economic Impact of Rules of Origin: Methodology and
4.3. Data and Statistics
4.3.5 Descriptive Statistics
This section provides information for a better understanding of the data. Figures 4.1-4.10 indicate the frequency and total trade observed under each specific rule for all the agreements in the sample.78 They are useful to compare the relative importance of the different types of rule for each agreement in terms of the percentage of all products that are traded under that rule and the percentage volume that trade represents. All Figures have been computed for one particular rule except Figure 4.4 which combines information on CTC, which is the sum of CC, CTH and CTS, and EXC. By definition, exceptions are can only take place with CTC, whether a CC, CTH or CTS.
Frequencies reveal how CTH is the most common type of rule across agreements, followed by RVC. Figure 4.4 indicates that several agreements rely entirely on CTC based rules, although reading together with the rest of the Figures confirms that in most cases, those rules are used in combination or as an alternative to other rules. This is more prominently in US-based agreements. EU-US-based agreements, on the other hand only marginally rely on CC rules. The latter are the only ones to use RVCEU because as explained in the previous chapter, this type of rule is a variation from the RVC used in EU agreements. Alternative rules are more common in EU-based agreements whereas combinations occur more frequently in US-based. This, in principle adds restrictiveness to US agreements as opposed
78 Frequencies in Figures 5.1-5.9 do not necessarily add up to a total of 100% because of the interactions between the different rules through combinations and alternatives. Similarly, values recorded in the Figures surpass total trade as volumes are counted double when there is an alternative or a combination in the rules.
to EU. On the other hand, EU-based agreements rely more on TT rules which have the potential for being more restrictive.
With regards to trade conducted under each rule, one of the prominent features is that most agreements seem to trade more in relative terms than the relative frequency for CTH and RVC, with the exception of Chile. In turn, in Chile‘s agreements, relative trade volumes are higher than frequencies for CC. In terms of the rest of the rules, no clear pattern emerges. In general Chile conducts a larger share of its trade under CTS than the relative frequency of this rule reveals whereas the rest of the countries have mixed results. As for TT, it is the EU the only reporter that indicates a larger share of trade than proportion of rules. On the contrary, the records less relative trade than percentage of rules in WO. Lastly, all countries except Chile conduct a larger share of their trade under ALT than its frequency.
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Figure 4.1. Freq. and Value of Change in Tariff Chapter (% of Total Rules)
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Figure 4.2. Frequency and Value of Change in Tariff Heading (% of Total Rules)
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Figure 4.3. Freq. and Value of Change in Tariff Subheading (% of Total Rules)
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CTC Frequency in % CTC Value in % EXC Frequency in % EXC Value in %
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Figure 4.4. Frequency and Value of CTC and Exceptions (% of Total Rules)
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Figure 4.5. Frequency and Value of Regional Value Content (% of Total Rules)
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Figure 4.6. Freq. and Value of Regional Value Content-EU(% of Total Rules)
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Figure 4.7. Frequency and Value of Technical Test (% of Total Rules)
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Figure 4.8. Frequency of Wholly Obtained (% of Total Rules)
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Figure 4.9. Frequency and Value of Combinations of Rules (% of Total Rules)
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Figure 4.10. Frequency and Value of Alternative Rules (% of Total Rules)
Figures 4.11 and 4.12 compare a similar aspect albeit focused on ―unique‖ rules. Relative frequencies are provided in Figure 4.11 and relative trade in Figure 4.12. The main difference with previous Figures is that 4.11 and 4.12 look at aggregate trade and frequencies for all agreements, rather than by individual ones. Also, because these rules are unique, the sum of the proportions of frequencies and trade does add up to one. Dividing origin protocols in 37 different rules implies that the frequency of each of them is greatly diminished. As a result, only seven rules are present in more than five percent of the total. By far, the rule that is more present is R1 (CTC), with over 30% of the total.79 The other rules surpassing 5 percent are R2 (RVC), R3 (TT), R5 (CTC with exception), R12 (alternative between CTC or RVC), R14
79 It must be noted that CTC is the sum of CC, CTH and CTS
(combination of CTC and RVC) and R28 (alternative between CTC or CTC combined with RVC). This Figure confirms the prevalence of CTC rules over other type of rules. Another implication of this Figure is that simple rules, i.e. those that are not presented in combination or as an alternative to other rules, are predominant in origin protocols. A similar trend is shown in Figure 4.12 although there exist some notable aspects. R12 (combination of CTC and RVC) increases its share in total trade from its share in total frequency and R14 (alternative between CTC and RVC), diminishes it. These observations are counterintuitive;
an alternative should promote trade and a combination, reduce it. Equally, R28 (alternative between CTC or CTC combined with RVC) also shows a higher percentage in terms of trade, whereas R3‘s (TT) is lower.
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R1 R2 R3 R4 R5 R6 R7 R8 R9 R10 R11 R12 R13 R14 R15 R16 R17 R18 R19 R20 R21 R22 R23 R24 R25 R26 R27 R28 R29 R30 R31 R32 R33 R34 R35 R36 R37
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Figure 4.11. Frequency of Each Combination of Rule
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Source: Origin Protocols and COMTRADE, own calculations Figure 4.12. Percentage of Total Trade by Type of Rule
The last set of Figures, from Figure 4.13 to Figure 4.16 illustrates trade volumes between reporters and their partners and their evolution over time. The key aspect in these Figures is the existence of very important differences in total trade with their partners for all reporting countries, all having one predominant partner except Chile. Another interesting feature of these Figures is that with the exception of the EU, all countries present considerable differences in their trade balances from one agreement to another. This suggests that there could be additional circumstances affecting their exporting capacity from one market to another, i.e. rules of origin.
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Figure 4.13. Chile's Total Trade with Partners
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Figure 4.14. EU's Total Trade with Partners
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Figure 4.15. Mexico's Total Trade with Partners
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Figure 4.16. USA's Total Trade with Partners
4.4. Conclusion
This thesis attempts to provide an estimate of the impact on trade of product specific rules of origin (RoO) and regime-wide provisions, as well as to construct an ex-post restrictiveness index on the basis of the results found in the estimations. Therefore, the driving force behind the choice of methodology is how to assess the ex-post trade impact of RoO, as opposed to forecasting. The framework chosen for such analysis is the gravity equation, which has been widely used in order to assess different policy variables.
The gravity equation has become in the last decades one of the most popular empirical devices to analyze trade flows, having been used to control for practically any factor potentially influencing trade flows. Two main reasons stand out to place the gravity model as the preferred method of estimation in the context of this study. First, the gravity equation provides a relatively acceptable theoretical framework for the use of RoO. A second crucial reason for choosing gravity modeling as the preferred framework is its good empirical fit.
Additionally, a number of theoretical considerations are explored in order to correctly: i) whether the gravity equation suits the desired data sample, consisting of North-North and North-South trade flows; ii) whether the model can evaluated at the disaggregated level; iii) which trade flow can be theoretically sound to be explored. These three questions are looked into by reviewing the theory about the gravity model, which confirms each of the issues. A final theoretical consideration provides a justification to perform the analysis using panel data.
Under the conditions provided for the theoretical aspects, the general equation to be
which will be estimated for total trade, exports and imports.
Subsequently, the approach for modeling the RoO is described. The underlying logic beneath it is to transform the product-specific RoO in dummy variables that can be plugged into the equation and their coefficients estimated. However, the intrinsic complexity of rules the rules of origin calls for the elaboration of four different types of analysis in order to ensure their correct study, each of them requiring its own way of introducing the product-specific RoO.
The first method considers all possible interactions of the four families of rules, including combinations, alternatives and exceptions to the main rule; the second method attempts to identify the individual impact of each of the main four families; the third method is an extension of the second, with the difference that divides the main CTC family into its subcomponents (CC, CTH and CTS); and the fourth method assigns an individual value to every possible combination of rules, classifying each of them as a different dummy variable.
One implication of this methodology is that it considers RoO as being exogenous, which may give rise to potential endogeneity bias. The usual way to correct this bias is the use of fixed effects at the individual level. This option is discarded regarding the time-invariant nature of the key variables of interest.
The study analyzes total trade, exports and imports at the 6-digit level for four reporting countries and 16 partner countries for the period between 2005 and 2008, yielding 1,224,833 observations. Trade data is obtained from COMTRADE. Data for rules of origin is obtained directly from the protocols of origin of each FTA. Considering that EU-based protocols amount to around 800 product specific rules and US-based to around 2,000, it yields a total of close to 24,000 rules that need to be coded.
The most frequent rule in origin protocols is CTH, followed by RVC, although these two rules are less commonly used individually and rather are combined or supplemented with other rules. Additionally, these two rules are, on average, represent a higher proportion of total rules present in origin protocols than the trade channeled through them on total trade.