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Multiple preference regimes and rules of origin

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Abstract

This study examines how reforming the rules of origin (RoOs) in one preference regime affects trade under each tariff regime. To do this, we focus on Japan’s imports of apparel products from Cambodia and Myanmar during the 2013–2018 period. In these trade flows, two preference regimes are available in addition to a most favored nation regime. We find that the relaxation of RoOs in one regime in 2015 increased imports under that regime but decreased imports under the other regimes. As a result, total imports increased by approximately 80%.

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Notes

  1. Similarly, Andersson (2016), Augier et al. (2005), and Bombarda and Gamberoni (2013) investigated the trade effect of RoO relaxation by examining the time series changes in the cumulation base (i.e., from bilateral to diagonal cumulation).

  2. In this study, exports under a tariff regime mean those that requested tariffs in that regime.

  3. Although both the GSP-LDC and the AJCEP are available in Laos, we do not examine Japan’s imports from Laos for the reason discussed in Sect. 3.1. No other beneficiaries of Japan’s GSP-LDC regime have an RTA with Japan.

  4. More precisely, there are some woven apparel products that follow the two-stage processing rule in the GSP-LDC regime. We discuss this issue again in Sect. 4.

  5. In the context of NRPTAs, data on trade value according to tariff regime are employed by some studies (e.g., Francois et al., 2006; Hakobyan, 2015). However, those studies only examine the extent of NRPTA utilization rather than its trade creation effect.

  6. See http://www.mofa.go.jp/policy/economy/fta/strategy0210.html.

  7. See http://www.mofa.go.jp/policy/economy/gsp/explain.html.

  8. In contrast, for non-LDC beneficiaries of the GSP, the GSP regime is no longer available if they have RTAs with Japan and the GSP tariff rates are not lower than the RTA tariff rates. Indeed, GSP tariff rates were not available during our study period when importing knitted apparel products from Indonesia, Malaysia, Thailand, the Philippines, and Vietnam.

  9. See https://www.wto.org/english/thewto_e/minist_e/mc9_e/brief_ldc_e.htm.

  10. See https://www.meti.go.jp/english/report/data/2018WTO/pdf/02_05.pdf.

  11. More precisely, the “cumulation rule” is a bit different between the GSP and AJCEP. In the GSP, it is called the “donor country content rule,” which allows the use of imports only from Japan.

  12. When exporting apparel products to ASEAN countries, our study LDCs may use fabrics from China rather than those from ASEAN countries or Japan and apply the ASEAN-China free trade area regime.

  13. According to the Survey of Japanese-affiliated firms in ASEAN, India, and Oceania conducted by the Japan External Trade Organization (JETRO), among the Japanese affiliates in the apparel industry (including both knitted and woven apparel) that export from the three LDCs to Japan, the average procurement shares from Japan, other ASEAN countries, and China were, respectively, 20%, 30%, and 46% in 2013. Those shares change to 25%, 12%, and 53%, respectively, in 2016. These three sources account for over 90% of the total procurement value for apparel exporters in the three LDCs. After the relaxation of RoOs in the GSP-LDC regime, the procurement shares from other ASEAN countries declined and from China rose. Note that when we examine total imports of fabric in the three LDCs, we observe that South Korea and Taiwan are also key exporters of fabric to these LDCs. This observation is because these LDCs export their apparel to Japan as well as other countries, such as European countries and the United States. See Table 9 in the Appendix.

  14. We regressed logged import prices of fabrics from China, Japan, and Thailand in the three LDCs during 2012–2018. Fabrics include products falling under the headings 50.07, 51.11 to 51.13, 52.08 to 52.12, 53.09 to 53.11, 54.07 to 54.08, 55.12 to 55.16, or Chapter 60. We introduce exporting country fixed effects, importing country fixed effects, HS six-digit code fixed effects, and year fixed effects. We obtain trade data from the BACI database provided by the CEPII and estimate this model using ordinary least squares regression analysis. The results of exporting country fixed effects indicate that import prices from China are 41% lower than those from Japan and 28% higher than those from Thailand. However, note that relatively expensive (high-quality) fabrics might be used for exports to Japan.

  15. During our study period, China also benefited from Japan’s GSP. As previously mentioned, inputs from China cannot be cumulated when our study LDCs export under the GSP-LDC regime. In 2019, China graduated from the GSP regime.

  16. For the same reason, fabrics produced in Vietnam might be used.

  17. These items are woven apparel products. Imports of the four products account for around 2% of the total imports of woven apparel from Cambodia and less than 1% from Myanmar.

  18. Hakobyan (2015) introduced the share of local content value added for the production of exporting products when examining the utilization rates of GSP in the US. This variable plays a good role in examining the effects of RoOs in this context because the RoOs for all products follow the regional value content rule in the US GSP. On the other hand, since specific process rules are set for our sample products, the use of the local content share is not appropriate in our context. In addition, Francois et al. (2006) and Manchin (2006) introduced some gravity variables such as gross domestic product, population size, distance, and past colonial relationship. In our empirical model, these elements are controlled by country–year fixed effects.

  19. For example, Tanaka (2021) exploit country-by-country differences because EU reformed RoOs in both knitted and woven products. Thus, he cannot control for country–year fixed effects unless adding other products to his study products.

  20. In the context of RTAs, for example, after reducing tariffs, countries may introduce NTMs and thereby decrease trade (e.g., Beverelli et al., 2019; Niu et al., 2020).

  21. https://www.wto.org/english/res_e/statis_e/itip_e.htm.

  22. We also examine the correlation of country–year-level exports between knitted and woven apparel. It was 0.98 in Cambodia, 0.47 in Laos, and 0.83 in Myanmar. The low correlation in Laos might indicate an alternative relationship in production between the two sectors. Although we believe that such a relationship is relatively weak in Cambodia and Myanmar, its existence will yield bias in our estimates. For example, if the users of GSP-LDC in woven apparel switch to those in knitted apparel, our estimates in GSP-LDC suffer from upward bias.

  23. See http://www.kanzei.or.jp/english/.

  24. The average, median, minimum, and maximum values of MFN rates in HS 61 are, respectively, 8.5%, 8.3%, 5%, and 10.9%. The corresponding statistics for HS 62 are 9.5%, 9.1%, 3.25%, and 13.4%, respectively.

  25. One may not be interested in differentiating between preference tariff regimes. For example, more attention may be paid to the sum of the shares of AJCEP imports and GSP-LDC imports as the overall utilization rate (Keck and Lendle, 2012). However, since the relaxation of RoOs in one specific preference regime plays a central role in our study, we differentiate utilization even between preference tariff regimes. In addition, our measure is different from the mean utilization rate presented in Table 1 in Sytsma (2021), which takes the simple average of product-level utilization rate (i.e., a simple average of \(\frac{{Imports}_{ipt}^{Regime}}{{\sum }_{Regime}{Imports}_{ipt}^{Regime}}\)) among the study products.

  26. One may be interested in why GSP-LDC and AJCEP users coexist. For example, the quality of their products may be different. Before the relaxation of Japan’s RoO, the former exporters using high-quality fabrics imported from Japan may produce high-quality knitted apparel. Another possibility is that more productive exporters may choose the AJCEP regime because its use enables to input cheaper fabrics from ASEAN (i.e., lower variable costs) but may require higher fixed costs for cumulating those fabrics in certifying the origin than the case of the GSP-LDC regime. Although we do not examine these mechanisms in this paper, it is worth investigating the selection mechanisms among multiple preferential regimes in the future analyses.

  27. The data on imports under the GSP-LDC regime are available from 2013.

  28. Another reason for the smaller effect in 2015 may be because it takes some time to inform a policy change (i.e., relaxation of RoOs) of firms and LDC government officials. Indeed, on April 14, 2015, the overseas branch of the Japan External Trade Organization in Myanmar reported that it takes some time that officials in Ministry of Commerce in Myanmar, which is in charge of issuing certificates of origin, accommodate this change. See https://www.jetro.go.jp/biznews/2015/04/552ccfa4441d8.html.

  29. Also see footnote 13.

  30. Fabrics include products of heading 50.07, 51.11 to 51.13, 52.08 to 52.12, 53.09 to 53.11, 54.07 to 54.08, 55.12 to 55.16, and chapter 60.

  31. See footnote 14.

  32. Several studies have found the positive effects of exporting under preferential tariff regimes on export prices. Cadot et al. (2005) found a rise in export prices in the context of Mexican textile and apparel exporters through use of the NAFTA by around 80 percent of the preference margin. Ozden and Sharma (2006) examined the impact of the US Caribbean Basin Initiative on the prices received by eligible apparel exporters and found that export prices rose by around 65 percent of the preference margin. African apparel exporters captured 16–53 percent of the preference margin under the African Growth and Opportunity Act (Olarreaga and Ozden, 2005). Cirera (2014) found the rise in export prices to the European Union through the use of the GSP and its related schemes to be 17–80 percent of the preference margin.

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Acknowledgements

I would like to thank two anonymous referees, Fukunari Kimura, Kiyoyasu Tanaka, Maki Nakaoka, and seminar participants at Kochi University, Nanzan University, Chuo University, and the Institute of Developing Economies for their invaluable comments. The author acknowledges financial support from the JSPS under KAKENHI Grant Number JP17H02530. The data are available upon request. To the best of my knowledge, the author has no conflict of interest, financial or otherwise.

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  1. Development Studies Center, Institute of Developing Economies, Wakaba 3-2-2, Mihama-ku, Chiba-shi, Chiba, 261-8545, Japan

    Kazunobu Hayakawa

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Appendix

Appendix

See Tables 9 and 10, Fig. 2.

Table 9 Fabric import shares: top 10 countries in terms of exports in 2013, Source: BACI Database
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Table 10 Shares of imports from laos under each tariff regime relative to total imports, Source: Author’s computation using Trade Statistics from Japan’s Ministry of Finance
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Fig. 2
figure 2

Exports of apparel products (HS 61–HS 62) to selected asian countries (2012 = 1), Source: Author’s compilation using the Global Trade Atlas

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Hayakawa, K. Multiple preference regimes and rules of origin. Rev World Econ 159, 673–696 (2023). https://doi.org/10.1007/s10290-022-00479-w

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