The role of Rules of Origin in the process of Euro-Med integration

The overall aims of this research project were to focus on the possible importance of of Rules of Origin (ROOs) on trade flows in two ways. First, the project econometrically evaluated the impact of the introduction of Pan-European diagonal cumulation in 1997 on trade between previously non-cumulating countries; secondly we consider the importance of rules of origin for the case of Egypt.
For the first part of the report we build on earlier work by Augier, Gasiorek and Lai-Tong (2005), and where in particular we consider the impact of diagonal cumulation at the sectoral level. We consider 27 sectors, and show strong evidence that cumulation did indeed appear to have a positive impact on spoke-spoke trade (ie on trade between the EU’s partner countries). That impact on trade ranges from between 14% to 150% depending on the sector under consideration and on the econometric specification. We take these results as a direct indication of the underlying restrictiveness of the EU’s rules of origin, and of the possible impact on trade of their relaxation. It should be noted that these estimates are not direct estimates for the EU’s Mediterranean partner countries. This is because these countries did not become part of the Pan-European Cumulation system at that time, and hence it is impossible to assess the impact on their trade. However, the estimates do then shed light on the possible magnitude of the impact on the Mediterranean partner countries trade as they become part of the Pan-European system, which was made possible after the Palermo Declaration 2003. In particular, in this context, it is interesting to note that the biggest impact of cumulation appears to have been Clothing, Leather, Electrical Machinery and Transport Equipment. Finally in this part of the report we also present results which suggest little evidence of external trade diversion occurring following the introduction of cumulation.
We then consider what might be the key explanatory variables driving the degree of restrictiveness of the underlying rules of origin. We show that there is weak evidence that EU tariffs are important in determining the restrictiveness of rules of origin. This is perhaps surprising given that the tariff represents the penalty where rules of origin have not been satisfied. Secondly, the analysis indicates that rules of origin do tend to be more restrictive the higher the share of exports in that industry being directed to the EU. This provides secondary evidence that the setting of rules of origin may be strongly determined by political economy considerations, where the ROOs are most restrictive in those areas were partner countries may be most competitive. This is also supported by the results with regard to the share of intermediate imports of each industry. Thirdly, the evidence suggests that greater use of the VA criterion tends to be associated with rules of origin being less restrictive. This is an interesting result which calls for further research, as it has important policy implications.
The second part of this report, focussed much more directly on the role of rules of origin for the Mediterranean region, by examining the possible importance of rules of origin and their cumulation for the case of Egypt. Here the underlying methodology was based on existing data on patterns of trade and production, and also on detailed interviews undertaken with a wide range of industry representatives within Egypt. An examination of the available evidence on patterns of production and trade indicates that much of what Egypt exports to the EU is in products where obtaining originating status is relatively easy. However, an in particular utilisation rates, suggests that in aggregate 48% of Egyptian exports are eligible for preferential access to the EU market, but that just over 13% of those exports in fact pay MFN duties. When we consider this by industry there is some evidence that there are certain industries where the take up of preferences is lower, and that these are sectors with higher shares of intermediate imports, and sectors where the value added criterion is typically applied.
The results from this analysis are extremely interesting, and this is because in general we find that currently EU rules of origin are not perceived as a major problem or obstacle for Egyptian exporters, and that the lack of Pan-European cumulation in most cases is not perceived to constrain firms’ choice of intermediate input supply. One exception to this is that of the textile industry where there is some evidence that the possibilities of cumulation in particular with Turkey, may impact of firms’ incentives and improved ability to export to the EU. There are two principal explanations for the relative lack of significance of the issue of rules of origin in Egypt. First, anecdotal evidence suggests that obtaining a proof of origin certificate from the Egyptian authorities is extremely straightforward with little or no verification checks being undertaken. Secondly a large proportion of Egypt’s exports to the EU are in sectors where establishing proof of origin is relatively simple either because the goods are wholly obtained, or because of the high use of domestic intermediate inputs (eg. Egyptian cotton). In part this also reflects the overwhelming concentration of Egyptian exports in primary products, and in low-tech manufacturing products. In turn this suggests that although currently rules of origin may not be constraining, as Egyptian exporters attempt to diversify, move up the value-chain, and become more vertically integrated in world trade, that rules of origin may then prove to me of greater significance.