Academic journal article Law and Policy in International Business

Choice at the Crossroads: Regionalism and Rules of Origin

Academic journal article Law and Policy in International Business

Choice at the Crossroads: Regionalism and Rules of Origin

Article excerpt


Few would dispute that regional efforts toward economic integration bring benefits to both the regions and the global economy. These agreements often reduce barriers difficult to reach in a multilateral negotiation and serve as important stepping stones toward higher standards.(1) However, little light has been shed on the darker side of regional arrangements.(2)

One aspect of this darker side is the internal regimes that these agreements must employ to ensure that only parties benefit from an agreement's lower tariffs and to prevent other countries from taking advantage of remaining tariff differences. These regimes are referred to as "rules of origin." When rules of origin are unduly restrictive, requiring that a large percentage of a product's components come from regional sources, they compel high domestic content and thus artificially force investment.

In the course of establishing regional agreements, parties have used rules of origin--generally at the behest of their industries--to manipulate the terms of investment in particular sectors at the expense of competitors from other countries. The European Community (EC) began these "investment wars" by targeting certain high-tech sectors, notably semiconductors, at the expense of the United States and Japan. The North American Free Trade Agreement (NAFTA) partners have followed suit by requiring high levels of investment to gain access to NAFTA markets for an array of telecom and electronics products, going one step further by adding politically sensitive products like textiles, autos, and machine tools, at the expense of Japan and Europe.

Now we are at a crossroads in several key negotiations that will determine the future role of rules of origin and hence the contours defining the terms of trade and investment for U.S. companies in the coming decades. Most important are the negotiations to create a Free Trade Area of the Americas (FTAA) in the Western Hemisphere and WTO negotiations to harmonize multilateral origin rules.

The choice before both policy-makers and the private sector is whether to continue what are amounting to beggar-thy-neighbor investment wars by applying the very restrictive NAFTA origin rules in our future negotiations,(3) or whether to place greater emphasis on sectoral customs unions(4) or free trade areas where possible.(5)

While the former path will probably be the one of least resistance, its consequences could be alarming for both our own exporters and the world economy: if the U.S. business community and U.S. policy-makers determine that it is best to seek the adoption of NAFTA rules of origin throughout the hemisphere(6)--and are largely successful in doing so in negotiations with other subregional groups--we could discover at the end of the day that in fact we have created a "sectoral trade bloc," where producers must source products of the most politically powerful industries within the region if they want to take advantage of the benefits of the agreement.(7)

However, in order to make this critical choice, negotiators and industries will have to come to grips with the larger issue of what they want regional agreements to accomplish. Do they want these agreements to protect domestic producers by ensuring that they will be the first to benefit from the agreements, or do they want the agreements to provide the flexibility to source globally so that domestic producers can price their products competitively in world markets? The NAFTA experience has made it clear that using rules of origin to accomplish broader policy objectives brings these two economic priorities into stark conflict.


Unlike NAFTA, where encouraging investment was an important, but not always primary, purpose in designing rules of origin, EC rules are more directly tied to an industrial strategy of defining acceptable forms of direct investment, creating desired types of jobs, and transferring desired technologies. …

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