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4. What drives the significance of ROOs?
The evidence above indicates that the introduction of diagonal cumulation
significantly impacted on trade flows between the cumulating countries. This then
provides direct evidence that the underlying rules of origin were indeed constraining,
as discussed in Section 2.2 of this paper. For the EU’s Southern Mediterranean
partner countries this is an important conclusion – for it suggests that participation in
the Pan-Euro-Mediterranean rules of origin is likely to increase the degree of intraregional
integration, and is likely to enhance the positive welfare effects of closer
integration with themselves and with the EU.
In this part of the paper we build on the preceding analysis and examine whether any
light can be shed on circumstances under which rules of origin are more likely to be
constraining. This is an important empirical and policy question, as it can help to
identify policies which are then likely to minimise the constraining impact of rules of
origin.
4.1 Firm, sectoral, and country level characteristics
The factors which are likely to impact on the constraining nature of rules of origin
will inevitably be related to firm level, sectoral level and country level characteristics.
These are summarised below:
Firm level characteristics:
• The nature of the production processes employed. This is likely to be relevant
both when the underlying ROO is based on a specific production processing
criterion, but also when the criterion is value added base as the underlying
production technology will determine the share of value added in production.
• The degree of the (vertical) integration of the firm in an international supply
chain. For firms that are more closely integrated into international supply chains
the sourcing of imported intermediates is likely to be more significant, and
consequently changes in rules of origin are more likely to have an impact.
• The efficiency of the firm, where the underlying ROO is based on the value added
criterion. The share of domestic value added to (imported) intermediates is likely
to be higher for less as opposed to more efficient firms, hence making it more
likely that less efficient firms would be able to satisfy the ROO criterion.
• The bigger the cost difference in intermediate supply between firms in cumulating
(be this bilaterally or diagonally) and non-cumulating countries. If the cost of
intermediates produced in non-cumulating countries were substantially lower, that
this would make it more likely that firms in the cumulating countries would wish
to use those intermediates in production.