Rules of Origin: Bridging Regions to Withstand Turbulent Times

Abstract

Global value chains are increasingly characterized by regional manufacturing “factories”: “factory” Europe, “factory” Asia, and “factory” North America. Underpinning these are the rules of origin (ROOs) of the regional trade agreements (RTAs). ROOs provide incentives to sourcing intermediate goods from the RTA parties, resulting in exclusionary effects on exports from third countries. The exclusionary effects are exacerbated in some ROOs because they are more restrictive than necessary to determine origin. Overall, product-specific ROOs in a plurilateral RTA that includes a manufacturing hub nation tend to be more restrictive than those in a bilateral RTA. Hence, the question arises whether the EU and Asia can develop an arrangement that can bridge the two regions without further fracturing global value chains. This chapter proposes that the extension of the Regional Convention on Pan-Euro-Med Preferential Rules of Origin (PEM Convention) to EU’s trading partners in Asia can enable geostrategic cooperation between the EU and its trading partners in Asia. In tandem with the underlying bilateral RTAs, the extended PEM Convention has an advantage over a plurilateral RTA because bilateral RTAs allow differentiated agreements in value-based issues. However, that the extension of the EU’s regional value chains to Asia may risk weakening global value chains.