Protecting Free Trade: The Political Economy of Rules of Origin

Abstract

The design of rules of origin in free trade agreements (FTAs) arouses spirited lobbying campaigns that mostly escape public attention. This article argues that the domestic groups generally most favorable to FTAs differ in their preferences over rules of origin: industries with large returns to scale favor strict rules of origin to gain scale economies in an FTA, while industries with multinational supply chains prefer lenient rules of origin to accommodate offshore procurement. An econometric analysis of rules of origin in the North American Free Trade Agreement (NAFTA) finds tougher rules of origin the higher the external trade protection and the larger the returns to scale, and more permissive rules of origin the greater the involvement in foreign sourcing. The results suggest that rules of origin may be critical to building domestic coalitions for FTAs. Industry preferences toward rules of origin therefore have important implications for the politics of FTA ratification.