Diagonal Cumulation Research Articles

Rules of Origin in the EU-UK Trade and Cooperation Agreement: Conceptual and Practical Challenges

In the context of preferential trade agreements, Rules of Origin have attracted negative attention for their propensity to serve protectionist objectives. Against this background, the author seeks to shed light on several conceptual and practical challenges in connection with the Rules of Origin negotiated in the EU-UK Trade and Cooperation Agreement. The discussion proceeds from two basic propositions: first, the Rules of Origin included in this agreement resemble, in essential terms, those included in other modern EU trade agreements with advanced-economy partners; and second, preferential Rules of Origin, such as those agreed between the EU and the UK, embody the outcome of reconciling the divergent interests of import-competing and export industries by the negotiating partners. The author has identified and analysed the following specific challenges posed by the Rules of Origin in the EU-UK Trade and Cooperation Agreement: (1) limited possibilities for origin cumulation; (2) protectionist potential of transitional origin requirements and origin quotas; (3) trade-hindering effect with respect to Northern Ireland; and (4) chilling effect of the potential review of inward processing schemes on trade. Based on the analysis conducted, the author concludes that these challenges negatively affect trade because they operate to foreclose the expansion of legitimate trade opportunities under the EU-UK Trade and Cooperation Agreement. Origin, Rules of Origin, Preferential Origin, Free Trade Agreements, EU-UK Trade and Cooperation Agreement, Brexit, Inward Processing, Returned Goods, Diagonal Cumulation, Origin Quotas

On the relationship between rules of origin and global value chains

This paper uses a modified gravity model to investigate the effects of rules of origin (RoO) on 61 countries’ participation in global value chains (GVCs) during the period 2005–2015. We define GVC participation as the value added contained in exports, looking both backward and forward from a reference nation. RoO are heterogeneous in the degrees of restrictiveness that govern the origin of products to obtain preferential tariff treatment. The empirical results show negative relationships between RoO’s restrictiveness and both backward and forward participation, and these adverse effects become more prominent when we control the endogeneity bias. However, the implementation of regime-wide RoO, including diagonal cumulation and de minimis, can reduce these negative effects. The mitigating roles of both regime-wide rules are quite similar in terms of magnitude, which is significant as the current literature on the liberalization of RoO only focuses on the role of cumulation. Our findings suggest that in order to upgrade participation in international production networks, a country should adopt a less restrictive and regime-wide RoO in free trade agreement (FTA) negotiations.

Upgrading the global value chain with regime-wide rules of origin

ABSTRACT Participation in the global value chain (GVC) is defined as the value added contained in exports, looking both backward and forward from a reference nation. This article applies the gravity model to investigate the effects of the regime-wide rules of origin (RoO), including diagonal cumulation, de minimis, and self-certification requirements, on GVC participation with 40,568 observations covering 61 countries from 2005–2015. Our main finding is that the liberal RoO can help upgrade both types of GVC participation.

Collision-energy dependence of second-order off-diagonal and diagonal cumulants of net-charge, net-proton, and net-kaon multiplicity distributions in Au + Au collisions

We report the first measurements of a complete second-order cumulant matrix of net-charge, net-proton, and net-kaon multiplicity distributions for the first phase of the beam energy scan program at RHIC. This includes the centrality and, for the first time, the pseudorapidity window dependence of both diagonal and off-diagonal cumulants in Au+Au collisions at \sNN~= 7.7-200 GeV. Within the available acceptance of $|\eta|<0.5$, the cumulants grow linearly with the pseudorapidity window. Relative to the corresponding measurements in peripheral collisions, the ratio of off-diagonal over diagonal cumulants in central collisions indicates an excess correlation between net-charge and net-kaon, as well as between net-charge and net-proton. The strength of such excess correlation increases with the collision energy. The correlation between net-proton and net-kaon multiplicity distributions is observed to be negative at \sNN~= 200 GeV and change to positive at the lowest collision energy. Model calculations based on non-thermal (UrQMD) and thermal (HRG) production of hadrons cannot explain the data. These measurements will help map the QCD phase diagram, constrain hadron resonance gas model calculations, and provide new insights on the energy dependence of baryon-strangeness correlations. An erratum has been added to address the issue of self-correlation in the previously considered efficiency correction for off-diagonal cumulant measurement. Previously considered unidentified (net-)charge correlation results ($\sigma^{11}_{Q,p}$ and $\sigma^{11}_{Q,k})$ are now replaced with identified (net-)charge correlation ($\sigma^{11}_{Q^{PID},p}$ and $\sigma^{11}_{Q^{PID},k}$)

Export Performance and Access to Intermediate Inputs: The Case of Rules of Origin Liberalisation

AbstractInternationally fragmented production processes have highlighted the need of efficient sourcing from foreign suppliers. This paper aims to investigate how exports of final goods are affected by better access to foreign intermediate inputs. In particular, the paper empirically tests whether expanding the set of available intermediate input suppliers through preferential rules of origin liberalisation affects exports of final goods. We exploit the introduction of the southern Mediterranean countries into the Pan‐Euro‐Med zone of diagonal cumulation which meant that foreign intermediate inputs could be used from more countries than before without jeopardising the preferential access to the EU. Using a fixed effects specification that controls for detailed levels of unobserved heterogeneity and multilateral resistance, we examine the effect of the new diagonal cumulation possibilities on southern Mediterranean exports to EU‐15. We find a positive effect on both export intensity, the value of exports, and export diversification, the number of exported products. Being part of the Pan‐Euro‐Med zone of diagonal cumulation is associated with a 20 per cent increase in export intensity and a 5 per cent increase in export diversification.

The European Neighbourhood Policy and Israel: Achievements and Disappointments

Over a decade has passed since the European Union (EU) launched its European Neighbourhood Policy (ENP) and nine years since the Action Plan with Israel was adopted. Politicians on both sides talked about deep economic integration, ‘a stake in the internal market’, ‘everything but institutions’, and arrangements that could be as close as what the EU has with countries like Norway or Iceland in the European Economic Area. This article aims to examine to what extent the great hopes with which the ENP was greeted both in the EU and in Israel have materialized, in particular in the field of international trade and economic integration. The article compares the actual achievements with the original goals of the ENP Action Plan and finds more disappointments than achievements. Among the achievements, the article describes and analyses the Agreement on Conformity Assessment and Acceptance for industrial products concluded in 2012 and the bilateral aviation agreement (‘Open Skies’), as well as Israel’s accession and successful participation in the EU scientific research and technical development programmes (including the ‘Horizon 2020’). The list of what could and should have been done, however, is longer and more disappointing, and it includes issues such as trade facilitation through modernization of customs administration, revision of outdated protectionist rules of origin, and the EU’s failure to contribute to peace in the Middle East by refusing to recognize diagonal cumulation of origin between Israel and its neighbours. Likewise, the lack of any progress on important topics such as competition rules, public procurement, trade in financial and professional services, e-commerce and investment, to name a few, outweighs the few achievements that can be noted. The article then proceeds to discuss the possible reasons for these disappointing results.

The European Neighborhood Policy and Israel: Achievements and Disappointments

Over a decade has passed since the EU launched its European Neighborhood Policy (ENP) and nine years since the Action Plan with Israel was adopted. Politicians on both sides talked about a deep economic integration, “a stake in the internal market”, “everything but institutions”, and an interconnection between Israel and the EU that could be as close as what the EU has with countries like Norway or Iceland in the European Economic Area. This article aims to examine to what extent the great hopes with which the ENP was greeted both in the EU and in Israel have materialized, in particular in the field of international trade and economic integration. The article compares the actual achievements with the original goals of the ENP Action Plan and finds more disappointments than achievements. Among the achievements, the article describes and analyzes the Agreement on Conformity Assessment and Acceptance for industrial products concluded in 2012 and the bilateral aviation agreement (“Open Skies”), as well as Israel’s accession and successful participation in the EU scientific research and technical development programs (including the “Horizon 2020”). The list of what could and should have been done, however, is longer and more disappointing, and it includes issues such as trade facilitation through modernization of customs administration, revision of outdated protectionist rules of origin, and the EU’s failure to contribute to peace in the Middle East by refusing to recognize diagonal cumulation of origin between Israel and its neighbors. Likewise, the lack of any progress on important topics such as competition rules, public procurement, trade in financial and professional services, e-commerce and investment, to name a few, outweighs the few achievements that can be noted. The article then proceeds to discuss the possible reasons for these disappointing results.

Impact of diagonal cumulation rule on FTA utilization: Evidence from bilateral and multilateral FTAs between Japan and Thailand

In this paper, we empirically investigate the effect of diagonal cumulation on free trade agreement (FTA) utilization by exploring Thai exports to Japan under two kinds of FTA schemes. While the one scheme adopts bilateral cumulation, the other scheme does diagonal cumulation. Comparing trade under these two kinds of FTAs, we can examine the effect of diagonal cumulation without relying on not only the variation in cumulation rules across country pairs but also the variation across years. In short, our estimates do not suffer from biases from time-variant elements and country pair-specific elements. As a result, our estimates show around 4% trade creation effect of diagonal cumulation, which is much smaller than the estimates in the previous studies (around 15%).

Trade-creating regime-wide rules of origin: a quantitative analysis

Regime-wide rules of origin (ROO), such as diagonal cumulation, de minimis and self-certification requirement, can be applied to reduce additional administrative and compliance costs for verifying restrictive ROO. However, empirical evidence related to the trade effect of various regime-wide ROOs is very few. We quantitatively investigate the trade effect of regime-wide ROOs by estimating the modified gravity equation with panel data on 36 238 country pairs covering 151 countries for 16 years from 1990 to 2005 at 5 year intervals. From our empirical experiments, we find that implementation of regime-wide ROOs such as diagonal cumulation and de minimis generate more trade between members of free trade agreements (FTAs). However, we also find that certification requirement does not produce positive trade effects. In addition, we confirm the effectiveness of the Poisson pseudo-maximum likelihood (PPML) estimator dealing with the zero trade issue and the presence of heteroscedasticity compared to the traditional log-linearized model estimation.

FIRM HETEROGENEITY, RULES OF ORIGIN, AND RULES OF CUMULATION*

This article sheds light on the restrictive nature of rules of origin (ROO) and on the role of diagonal cumulation in mitigating the protectionist content of ROO. Empirical evidence suggests that diagonal cumulation has beneficial effects on trade—particularly among spoke countries. We show that these patterns can be reconciled with a theoretical setting where heterogeneous firms buy intermediate inputs from domestic and foreign sources. The model finds that switching from bilateral to diagonal cumulation relaxes the restrictiveness of the ROO and leads the least productive exporters to stop exporting.

Diagonal cumulation of origin as an institutional incentive mechanism for cost optimisation in contemporary international business

In the emerging process of market globalisation, firms’ strategic options for optimising their cross-border operations have broadened. This paper presents a strategic framework for developing an appropriate strategic response of firms by relocating their production facilities and framing their operational procedures in such a way that they may, as eligible beneficiaries, exploit institutional incentive mechanisms available in a specific region or a host country. More specifically, in the paper we explore a strategic option for lowering firms’ operational costs through international operations by using the mechanism of diagonal cumulation of origin introduced by the European Union (EU) in its Common Commercial Policy towards selected non-member countries. Despite extensive discussions in theoretical literature on the conception of the rules of origin, only a few studies have explored the implications of this mechanism from the perspective of a firm’s transaction costs in international business. This paper shows that the ‘SAP+ diagonal cumulation of origin,’ when properly conceived and implemented by a firm, can positively affect its financial performance. By analysing the cost-effect simulation of a selected household appliance producer in the presented case study, we then discuss the key strategic and operational implications for firms wishing to take advantage of offered supranational institutional incentive mechanisms.

Do EU Rules of Origin Restrict Western Balkans’ Trade Performance?

This paper aims to examine quantitative and qualitative aspects of trade flows of the Western Balkan Countries (WBCs) and to assess appropriateness of EU trade policy arrangements with respect to the system of cumulation of rules of origin towards the WBCs in the past decade. Due to bilateral cumulation of origin rules under SAAs and autonomous trade preferences prior to march 2009 exporters in WBCs have been constrained when using inputs from other countries from the region, as only inputs sourced from EU have been accepted as local content granting preferential status in the EU markets. The estimations of income elasticities of import demand confirm that growth of intra-regional WBCs’ imports of intermediates was slower than growth of total intra-regional imports in response to GDP growth - most significantly for Macedonia and Albania, while the opposite was the case for WBCs’ imports from EU-15 and from new EU member. Further, the results based on gravity model estimations for Croatia suggest that lack of cumulation of rules of origin do indeed have significantly negative impact on bilateral trade flows, in particular for trade with intermediates and food and beverages. More specifically, where there is no cumulation of rules of origin between Croatia and importing country exports of industrial supplies are estimated to be 24% lower than expected levels in case of the diagonal cumulation.

Best practices for regional trade agreements

Complicated web of hub-and-spoke type of overlapping free trade agreements (FTAs) can result in high costs for verifying rules of origin (RoO) and trade diversion or suppression effects. This paper attempts to provide best practices for regional trade agreements (RTAs) to enhance global free trade by mitigating these negative effects. By adopting a gravity regression analysis, we quantitatively estimate the trade creation and diversion effects of cumulated RoO (bilateral, diagonal, and full cumulation) for RTAs established under GATT Article XXIV and under the Enabling Clause. We find that (i) RTAs, in general, create trade among members and divert trade from nonmembers, whereby the net trade-enhancing effect is rather weak; (ii) RTAs should be established under the comprehensive GATT Article XXIV, rather than the piecemeal Enabling Clause; and (iii) full cumulation is the most optimal provision in terms of creating the most intra-bloc trade and diverting the least extra-bloc trade. Overall, we strongly suggest that RTAs should employ full cumulation of RoO under GATT Article XXIV.

Breakdown of weak-turbulence and nonlinear wave condensation

The formation of a large-scale coherent structure (a condensate) as a result of the long time evolution of the initial value problem of a classical partial differential nonlinear wave equation is considered. We consider the nonintegrable and unforced defocusing NonLinear Schrödinger (NLS) equation as a representative model. In spite of the formal reversibility of the NLS equation, the nonlinear wave exhibits an irreversible evolution towards a thermodynamic equilibrium state. The equilibrium state is characterized by a homogeneous solution (condensate), with small-scale fluctuations superposed (uncondensed particles), which store the information necessary for “time reversal”. We analyze the evolution of the cumulants of the random wave as originally formulated by D.J. Benney and P.G. Saffman [D.J. Benney, P.G. Saffman, Proc. Roy. Soc. London A 289 (1966) 301] and A.C. Newell [A.C. Newell, Rev. Geophys. 6 (1968) 1]. This allows us to provide a self-consistent weak-turbulence theory of the condensation process, in which the nonequilibrium formation of the condensate is a natural consequence of the spontaneous regeneration of a non-vanishing first-order cumulant in the hierarchy of the cumulants’ equations. More precisely, we show that in the presence of a small condensate amplitude, all relevant statistical information is contained in the off-diagonal second order cumulant, as described by the usual weak-turbulence theory. Conversely, in the presence of a high-amplitude condensate, the diagonal second-order cumulants no longer vanish in the long time limit, which signals a breakdown of the weak-turbulence theory. However, we show that an asymptotic closure of the hierarchy of the cumulants’ equations is still possible provided one considers the Bogoliubov’s basis rather than the standard Fourier’s (free particle) basis. The nonequilibrium dynamics turns out to be governed by the Bogoliubov’s off-diagonal second order cumulant, while the corresponding diagonal cumulants, as well as the higher order cumulants, are shown to vanish asymptotically. The numerical discretization of the NLS equation implicitly introduces an ultraviolet frequency cut-off. The simulations are in quantitative agreement with the weak turbulence theory without adjustable parameters, despite the fact that the theory is expected to breakdown nearby the transition to condensation. The fraction of condensed particles vs energy is characterized by two distinct regimes: For small energies ( H ≪ H c ) the Bogoliubov’s regime is established, whereas for H ≲ H c the small-amplitude condensate regime is described by the weak-turbulence theory. In both regimes we derive coupled kinetic equations that describe the coupled evolution of the condensate amplitude and the incoherent field component. The influence of finite size effects and of the dimensionality of the system are also considered. It is shown that, beyond the thermodynamic limit, wave condensation is reestablished in two spatial dimensions, in complete analogy with uniform and ideal 2D Bose gases.

Fear and Loading in West Bank/Gaza: The State of Palestinian Trade

For many years, the international community has attempted to improve trade between the Palestinian Territories and its trading partners. The argument behind these efforts is that trade will spur economic growth and that the ensuing prosperity is expected to prove more fertile ground for any peace endeavours. It is also considered to be a force of good because it would raise the quality of life of Palestinian economic operators. As a result, numerous studies, sponsored by various donors, have been carried out to map the obstacles for the Palestinian businessman and the predicament and possibilities of the Palestinian trade regime. The first purpose of this overview article is to disseminate the main results of these studies. A second objective is to explore three additional yet understudied avenues for improving Palestinian trade flows: (1) opening the Rafah crossing between Gaza and Egypt for exports; (2) introducing diagonal cumulation of origin; and (3) improving trade in services.

The impact of rules of origin on trade flows

A great deal of post-war trade liberalization resulted from regional, preferential trade agreements. Preferential trade agreements cut tariffs on goods originating only in those nations that have signed the agreement. Therefore, they need ‘rules of origin’ to determine which goods benefit from the tariff cut. Rules of origin have long been ignored for two good reasons: they are dauntingly complex and at first sight appear mind-numbingly dull. The third standard reason for ignoring them – the assertion that they do not matter much – turns out to be wrong. We show that rules of origin are important barriers to trade. Moreover, such rules are emerging as an important trade issue for three additional reasons. First, preferential trade deals are proliferating worldwide. Second, the global fragmentation of production implies complex international supply chains which are particularly constrained and distorted by rules of origin. Third, the extent to which regionalism challenges the WTO-based trading system depends in part on incompatibilities and rigidities built into rules of origin. Our empirical results exploit a ‘natural experiment’ that was created by technical changes to Europe's lattice of rules of origin (ROOs) in 1997. This change, known as ‘diagonal cumulation’, relaxed the restrictiveness of rules of origin on trade among the EU's free trade agreement (FTA) partners without changing the degree of tariff preference. Our analysis allows us to establish a lower-bound and upper-bound estimate of trade impact of ROOs reduced trade among the EU's trade partners. The lower bound we find is something like 10% while the upper bound is around 70%. The second part of the paper draws the policy lessons that arise from considering the implications of our empirical findings. The most direct lessons are for FTA-writers. We argue that Europe's implementation of ‘cumulation’ is a good way of reducing the welfare-reducing impact of overlapping rules of origin without gutting their fraud-fighting ability. We also suggest a three-part procedure for establishing a more multilateral framework for rules of origin which would be more transparent, flexible, administratively feasible and negotiable. — Patricia Augier, Michael Gasiorek and Charles Lai-Tong

Rules of Origin and the EU‐Med Partnership: The Case of Textiles

This paper analyses the impact of rules of origin on patterns of trade in the context of the pan‐European system of diagonal cumulation. The paper first highlights the importance of rules of origin in all preferential trading arrangements while arguing that those rules can easily lead to trade suppression and/or trade diversion. We then focus on the introduction of the pan‐European system in 1997 and show evidence to suggest that the introduction of the system materially impacted on trade between the EU, and its CEFTA, EFTA and Baltic states partner countries. The main body of the paper then empirically explores the impact of the lack of cumulation in the textile industry on the countries of the Southern Mediterranean. The results suggest that rules of origin may indeed substantially constrain trade between non‐cumulating countries, possibly by as much as 70–80 per cent in aggregate. While preferential trading agreements thus serve to increase intra‐PTA trade through the liberalisation of trade barriers, they may also be doing so by effectively raising external barriers to trade through the use of constraining rules of origin. To the extent that they do so increases the likelihood of trade diversion and trade suppresion.

The economic impact of the Euro‐Mediterranean free trade area on Mediterranean non‐member countries

The new Euro‐Mediterranean Partnership will deepen the asymmetric trade interdependence between the EU and Mediterranean Non‐Member Countries. An even larger share of the latter's imports will originate in the EU displacing not only inefficient local producers (quite likely in the case of Morocco and Tunisia) but also non‐EU foreign suppliers (more likely in the case of Jordan or Egypt). This may have a negative effect on the income side of the Mediterranean Non‐Member Countries’ budgets (since tariff revenue will sharply decrease) and on their balance of payments (in terms of foreign currency spent on imports).The most promising feature of the new Partnership is its South‐South component provided that the plan allowing for the diagonal cumulation of origin rules is implemented.