The European Union's reform in rules of origin and international trade: Evidence from Cambodia

Abstract

AbstractThe European Union (EU) has unilaterally granted developing countries preferential access to EU markets under the Generalized System of Preferences (GSP). To obtain preferential access, exporters in beneficiary countries must follow the rules of origin (ROO) in the EU’s GSP. Previous ROO were criticised as restrictive, because exporters’ production costs increase with a restriction on imported inputs from the lowest‐cost third countries and the administrative process of proving origin. The EU simplified the restrictive ROO on January 1, 2011. However, the impact of the EU’s reform on beneficiary economies remains largely unexplored. This paper estimates the causal impact of simplifying ROO on garment exports in a beneficiary country, Cambodia, during the period 2007–2015. In the new ROO, garment exporters in least developing beneficiaries such as Cambodia can use imported fabric from any third country and still maintain preferential access. I adopt a difference‐in‐differences method and provide evidence to support the parallel trends assumption. The results show that garment exports to the EU increased by 112% after 2011, which coincided with a sharp increase in textile imports from China to Cambodia. Foreign direct investment inflows increased sharply after 2011 in the garment sector but decreased in the textile sector.