Assessing the Political Economy Factors on Trade Integration : Rules of Origin under NAFTA

Rules of origin (RoO) are legitimate policy instruments to prevent trade deflection in a Preferential Trade Agreement (PTA) short of a customs union. Yet, when captured by special interest groups, RoO can restrict trade beyond what is needed to prevent trade deflection. By how much do political economy factors account for the stringency of RoO? This study quantifies the impact of both determinants, those deemed as “justifiable” on the ground of preventing trade deflection and those arising from “political economy” forces, on the restrictiveness of RoO under NAFTA. The main finding is that political economy forces, especially from the US, significantly raised the restrictiveness of the RoO. Thus stricter RoO are associated with higher production costs reducing the potential benefits of enhanced market access initially pursued by the agreement.