Journal of World Trade 36(2): 171–188, 2002.

© 2002 Kluwer Law International. Printed in The Netherlands.

International Trade Law, Political Economy and

Rules of Origin
A Plea for a Reform of the WTO Regime on Rules of Origin

Moshe HIRSCH*

I. INTRODUCTION

Rules of origin (ROO) play a major role in the international trading system and
they constitute an indispensable component of any discriminatory arrangement. The
accelerated proliferation of both preferential agreements and selective restrictive
measures indicates that the importance of ROO is expected to increase in the coming
years. Parallel to the growing awareness of the importance of ROO, scholars and
policy-makers have become increasingly aware of the undesirable results of their
operation. The growing trend of employing ROO as a strategic instrument to restrict
trade intensifies these concerns. The pervasive use of ROO as a tool of protectionism
poses a significant challenge to the current trading system and calls for a reform of the
currently embryonic WTO regime on ROO.
Concepts and models of political economy may assist international trade law
scholars to understand the underlying functions of ROO and the factors behind the
growing trend to employ these rules to restrict trade. Furthermore, political economic
analysis may generate some important insights regarding the desirable legal mechanisms
to address trade distortions generated by the operation of ROO. As shown in the
following sections, the combination of international trade law and political economy
may well enrich scholars from both disciplines and bears important implications for
policy-making as well.
This article is structured as follows: Section II exposes the basic elements of the
political economy of international trade. Section III presents a political economy
analysis of the essential functions of ROO in the world trading system. The second
part of Section III briefly introduces the main tests employed in international trade to
determine the origin of goods. Section IV discusses the widening use of ROO as a
strategic trade instrument, and Section V employs political economy analysis to
identify the principal factors that explain this accelerated trend. Drawing upon this
analysis, Section VI suggests legal mechanisms for reforming the current WTO

* Arnold Brecht Chair in European Law, Faculty of Law and Department of International Relations,
Hebrew University of Jerusalem. This article is based upon a series of lectures on “Rules of Origin in
International Trade” delivered at the Academy of International Trade Law in Macao (June 2000). The author
would like to express his gratitude to Dr Tal Sadeh (of the Hebrew University of Jerusalem) for valuable comments
on the various drafts of this article.
172 JOURNAL OF WORLD TRADE

regime on ROO. Section VII concludes that the combination of international trade
law and political economy analysis may be a valuable tool to promote trade
liberalization in the sphere of ROO, as well as in other domains that are susceptible
to protectionism.

II. THE POLITICAL ECONOMY OF INTERNATIONAL TRADE:1 BASIC ELEMENTS

This section does not aim to present a general introduction to political economy
but, rather, to expose briefly the basic elements of the branch of political economy
that deals with international trade.2 Generally, political economy of international
trade posits two major connections: (i) external trade policy and internal political
processes are inseparable; and (ii) national and international trade policies are
mutually linked.3
The point of departure for political economy analysis of trade policy is that
international trade generates distributional consequences, i.e., there are “winners and
losers”. While international trade is generally beneficial to all participating states (it
maximizes the overall national income of each state), it also affects the domestic
distribution of income. Not only that the gains arising from free trade are not equally
distributed among the various segments of the population, it is also clear that some
groups incur significant losses.4 Thus, the increase in international trade is regularly
Kaldor-Hicks efficient, but not Pareto efficient.5
Political economy attempts to identify and predict the gainers and losers of free
trade or protection, and the sectors that are likely to support or oppose trade
liberalization. One of the famous arguments is presented in the Stopler-Samuelson
theorem.6 The theorem states that import protection increases the real income of
owners of the economy’s relatively scarce factors at the expense of owners of the
relatively abundant factors, who find that their real incomes have fallen under

1 Two synonymous terms are widely employed in the literature to describe the branch of political economy

that deals with international trade: “political economy of trade policy” and “political economy of international
trade”. This article employs these two terms interchangeably.
2 For various definitions of political economy and its evolution as a distinct discipline, see Peter

Groennewegen, Political Economy and Economics, in John Eatwell, Murray Milgate and Peter Newman (eds), The
New Palgrave Dictionary of Economics, Vol. III (London, Macmillan, 1987), p. 904. For a general introduction to the
political economy of trade policy, see Robert E. Baldwin, The Political Economy of US Import Policy (Cambridge,
MA, MIT Press, 1985), p. 3; Arye L. Hillman, The Political Economy of Protection (Chur, Hardwood Academic,
1989), p. 5.
3 See George T. Crane and Abla Amawi, The Theoretical Evolution of Political Economy (Oxford, Oxford

University Press, 1991), pp. 3–5; Roger Tooze, “International Political Economy in the Age of Globalization”, in
John Baylis and Steve Smith (eds), The Globalization of World Politics (Oxford, Oxford University Press, 1997),
pp. 212, 215. See also David N. Balaam and Michael Veseth, International Political Economy (2nd edn, Englewood
Cliffs, NJ, Prentice-Hall, 2000), pp. 4–6.
4 Hillman, as note 2 above, pp. 1–3; Ethan B. Kapstein, Winners and Losers in the Global Economy,

54 International Organization (2000), 359, 364.

5 Alan Sykes, Comparative Advantage and the Normative Economics of International Trade Policies, 1 Journal of

International Economic Law (1998), 49, 57–63.

6 Wolfang F. Stopler and Paul A. Samuelson, Protection and Real Wages, 9 Review of Economic Studies

(1941–42), 58.
 TRADE LAW, POLITICAL ECONOMY AND RULES OF ORIGIN 173

protectionist policy. Hence, owners of scarce factors are expected to oppose trade
liberalization while the owners of abundant factors are likely to favour free trade.7
The distributive consequences of international trade change in accordance with
the particular trade policy adopted by policy-makers. Trade policy instruments (e.g.,
tariffs) are of major importance for domestic groups that are interested in maximizing
the gains accrued to their members. Consequently, the shaping of trade policy is often
perceived in political economy literature as a struggle among domestic interest
groups.8
The resulting trade policy of a state is considered to be an outcome of the
interactions between various variables on two levels: (i) on the state-internal
level—interaction among various domestic groups (that seek to influence the
shaping of trade policy), as well as interaction between domestic groups and
policy-makers; (ii) on the international level—interaction between a particular state
and its trading partners.
The following model presents the main factors operating in the local arena in
which trade policy is shaped:9

The first two elements deal with the “demand side” of trade policy:
1. Individual Preferences: a description of individual preferences over the trade policy
alternatives.10

7 Stopler and Samuelson, ibid.; Hillman, as note 2 above, pp. 8–10; Helen V. Milner, The Political Economy

of International Trade, 2 Annual Review of Political Sciences (1999), 91, 95. This prediction is dependent upon
“factor specificity” (mobility or lack of mobility of the factors of production among sectors); see, in detail, James
E. Alt, Jeffry Frieden, Michael J. Gilligan, Dani Rodrik and Ronald Rogowski, The Political Economy of
International Trade: Enduring Puzzles and Agenda for Inquiry, 29 Comparative Political Studies (1996), 689, 697–700.
8 See, e.g., Peter Moser, The Political Economy of the GATT (Grusch, Verlag Ruegger, 1990), pp. 19–23.
9 Dani Rodrik, “Political Economy of Trade Policy”, in Gene M. Grossman and Kenneth Rogoff (eds),

Handbook of International Economics, Vol. III (Amsterdam, Elsevier, 1995), pp. 1457, 1459.
10 These preferences are derived from the expected outcomes of each alternative trade policy for each

domestic group; Rodrik, as note 9 above, p. 1459..

174 JOURNAL OF WORLD TRADE

2. Interest Groups: a description of how these individual preferences are aggregated and
channelled—through pressure groups, political parties, or other popular movements—
into “political demands” for a specific trade measure or policy.11
The next two elements of the model deal with the “supply side” of trade
policy:
3. Policy-maker Preferences: policy-makers shape and implement trade policy to promote
their own preferences. These preferences are not necessarily the same as those of the
above groups (policy-makers seek, e.g., to be re-elected or to promote the welfare of
some segments of the population).12
4. Institutional Structure of Government: trade policy is also influenced by the particular
institutional structure in which policy is shaped (e.g., parliament or the executive
branch).13
The above model focuses on the internal factors involved in the shaping of trade
policy, but international variables should not be overlooked in such an analysis.14 As
discussed below, both levels are of major importance for understanding the role of
ROO in the international trading system.
Political economy analysis is often inclined to reveal a pessimistic picture: that
international trade is not free, that protectionism is prevalent in the world trading
system, and that trade policies are almost always biased against free trade.15 Numerous
political economy studies sought to explain the tendency in favour of protectionism by
exploring the links between the variables presented above. These studies analysed, for
instance, the links between the content of trade policy and societal factors (e.g., the size
of the relevant interest groups), institutional variables (e.g., the electoral system), and
international factors (e.g., the prospect for retaliation by other states).16
11 This stage requires an analysis of the relevant political organization and the forms of political influence

(e.g., lobbying, campaign contributions, etc.); Rodrik, as note 9 above, pp. 1459–60.
12 Rodrik, as note 9 above, p. 1460.
13 On the implications of certain institutional features upon trade policy, see Edward D. Mansfield and

Marc L. Bush, The Political Economy of Nontariff Barriers: A Cross-National Analysis, 49 International Organization
(1995), 723, 729–731; H. Richard Friman, Rocks, Hard Places, and the New Protectionism: Textile Trade Policy
Choices in the United States and Japan, 42 International Organization (1988), 689, 695–698. For an in-depth
analysis of the implications of the delegation of trade policy authority by the US Congress to the executive
branch, see Michael J. Gilligan, Empowering Exporters: Reciprocity, Delegation, and Collective Action in American
Trade Policy (Ann Arbor, MI, University of Michigan Press, 2000), pp. 35–57.
14 On the role of international factors in the shaping of trade policy, see, e.g., Friman, as note 13 above,

pp. 698–699; Vinod K. Aggarwal, Robert O. Keohane, and David B. Yoffie, The Dynamics of Negotiated
Protectionism, 81 American Political Science Review (1987), 345, 348. ‘Strategic trade’ literature is focused on
the international variables of trade policy: see, e.g., Paul R Krugman (ed.), Strategic Trade Policy and the
International Economics (Cambridge, MA, MIT Press, 1986), p. 5; James A. Brander, “Strategic Trade Policy”, in
Gene M. Grossman and Kenneth Rogoff (eds), Handbook of International Economics, Vol. III (Amsterdam,
Elsevier, 1995), p. 1395; Stephen Greenwold, Strategic Interest and International Political Economy, 4 New Political
Economy 1 (1997), 97.
15 See, for instance, the statement made by Rodrik: “While the manner in which political influence is

exercised differs across models, the conclusion in common is: trade is not free because politically-influential groups
can be made better off by policy intervention in trade.” Rodrik, as note 9 above, p. 1470; see also p. 1476.
16 For a concise survey of the existing literature on this subject, see Milner, as note 7 above, pp. 95–107;

Rodrik, as note 9 above, pp. 1463–1470. For a broader survey, see Hillman, as note 2 above, pp. 24–72; Baldwin,
as note 2 above, pp. 6–32.
 TRADE LAW, POLITICAL ECONOMY AND RULES OF ORIGIN 175

One of the well-known explanations for the prevalent protectionism is focused

upon the size of the relevant interest groups. Protectionist measures generate large
profits to a small number of producers in the affected industry, while the harm caused
by these measures is spread among a large number of consumers. Regularly, the
organizational costs are lower for a smaller group of producers (owners and workers),
and higher for a larger group of consumers. In addition, the risk of free riding
(with regard to organizational costs) is much higher in the consumer group. These
factors make it easier for domestic producers to organize and exert pressure upon
policy-makers to adopt protectionist measures.17
Despite this gloomy picture of prevalent protectionism, scholars of political
economy do not overlook the intensified liberalization process in the international
community in recent decades. One of the central explanations for the move towards
free trade emphasizes the role of factors belonging to the international dimension of
trade policy.18 The inclination of states to restrict trade generates negative externalities
(“spillovers”) for other states. This outcome is prominent where import barriers in one
country produce harmful consequences to the exporting industries in other countries.
The pursuit of unilateral protectionist policies by all states leads to a situation analogous
to the Prisoners’ Dilemma,19 and all countries end up in a situation where their welfare
is lower than if all countries adopted free trade policies.20
The solution to the Prisoners’ Dilemma instructs states to pursue reciprocal
liberalization policies accompanied by credible threats to operate retaliatory measures.21
From this perspective, the main function of international trade agreements is to
formalize the exchange of commitments among states. Trade agreements (both

17 See, e.g., Jagdish Bhagwati and Douglas A. Irwin, “The Return of the Reciprocitarians: U.S. Trade Policy

Today”, in Jagdish Bhagwati (ed.), Political Economy and International Economics (Cambridge, MA, MIT Press, 1991),
pp. 84, 102; Jagdish Bhagwati, Protectionism (Cambridge, MA, MIT Press, 1988), p. 72; Gilligan, as note 13 above,
pp. 3–4.
18 For a survey of other explanations, see Milner, as note 7 above.
19 On the Prisoners’ Dilemma, see James D. Morrow, Game Theory for Political Scientists (Princeton, NJ,

Princeton University Press, 1994), pp. 78–81, 262–268. On the application of the Prisoners’ Dilemma to
international relations and international law, see Moshe Hirsch, Game Theory, International Law, and Environmental
Cooperation in the Middle East, 27 Denver Journal of International Law & Policy (1999), 75, 88, 109–115; Kenneth
W. Abbott, Modern International Relations Theory: A Prospectus for International Lawyers, 14 Yale Journal of
International Law (1989), 360–362; Glenn H. Snyder, Prisoners’ Dilemma and Chicken Models in International Politics,
15 International Studies Quarterly (1971), 66.
20 Bernard Hoekman and Michel Kostecki, The Political Economy of the World Trading System (Oxford, Oxford

University Press, 1995), p. 21; Robert W. Staiger, “International Rules and Institutions for Trade Policy”, in Gene
M. Grossman and Kenneth Rogoff (eds), Handbook of International Economics, Vol. III (Amsterdam, Elsevier, 1995),
pp. 1495, 1511–1515. See in detail on international trade and the Prisoners’ Dilemma, John A.C. Conybeare,
Public Goods, Prisoners’ Dilemmas and the International Political Economy, 28 International Studies Quarterly (1984),
5, 10–14.
21 On the importance of reciprocal measures as a means of solving the Prisoners’ Dilemma and other

collective action problems, see Robert Axelord, The Evolution of Cooperation (New York, Basic Books, 1984),
pp. 27–54; Martin Patchen, Strategies for Eliciting Cooperation from an Adversary, 31 Journal of Conflict Resolution
(1987), 171–181; Todd Sandler, Collective Action: Theory and Applications (Ann Arbor, MI, University of
Michigan Press, 1992), p. 83.
176 JOURNAL OF WORLD TRADE

bilateral and multilateral) include states’ obligations to reduce trade barriers on a mutual
basis, obligations that neither government would be willing to make alone.22

III. THE FUNCTIONS OF ROO: A POLITICAL ECONOMY PERSPECTIVE

The above political economy analysis argues that an international effort to reduce
protectionism must involve the operation of reciprocal trade regimes. The underlying
rationale for this approach is to avoid “free riding”: the benefits of free trade are not to
be accorded to all states. Trade concessions are to be granted only to products
manufactured in states that undertake and implement similar concessions to products of
other contracting states. Existing trade barriers vis-à-vis non-contracting parties are to
be maintained.
The operation of such “discriminatory” regimes necessitates a differentiating
mechanism to identify products manufactured in contracting states (which are eligible
for preferred treatment), to the exclusion of products manufactured in non-contracting
states. In addition, where a contracting party does not comply with its obligations
under the agreed trade regime, effective retaliatory measures are of significant
importance to maintaining the regime’s credibility in the long run. Efficient retaliatory
machinery presupposes the existence of a differentiating mechanism to make a
distinction between products manufactured in “co-operative” and “non-cooperative”
parties.
To sum up, the principal function of ROO in the international trading system is
to serve as a differentiating mechanism to distinguish between various products in
accordance with their place of production.23 This mechanism is indispensable for the
operation of reciprocal trade regimes that are designed to promote trade liberalization.
Thus, ROO function as “gate-keepers” in discriminatory trade regimes.24

22 See, e.g., Moser, as note 8 above, pp. 25, 39; John MacMillan, Game Theory in International Economics

(Chur, Hardwood Academic, 1986), pp. 31–33; Hoekman and Kostecki, as note 20 above, pp. 27–30. For
an analysis of the GATT/WTO system from this perspective, see Bhagwati, Protectionism, as note 17 above,
pp. 35–37, 40; Hillman, as note 2 above, pp. 121–123.
23 ROO function as a differentiating mechanism in preferential arrangements, but it should be noted that

these arrangements might operate in both directions: providing for either trade preferences (e.g., tariff reduction)
or restrictive measures (e.g., quantitative restrictions). Though the role of determining whether a particular
product qualifies for a certain trade preference is more noticeable, the rationale underlying both roles is the same.
24 ROO have an additional and distinctive role in free trade areas (FTAs). ROO are essential to maintaining

FTAs with different external tariffs towards non-FTA members. In the absence of ROO, imported products
from non-FTA countries would enter through the country with the lowest tariff and be re-exported to the
other FTA members. After a certain period, such a pattern of trade flow is expected to exert pressure upon the
states with the higher tariff rate to lower their tariff rate, nearing that of the state with lowest duty. Such a
process is likely to put pressure on the FTA members to adopt the same external tariff rates, i.e., to form a
customs union. The operation of ROO averts this undesirable development by not allowing products
manufactured in non-FTA countries to enjoy duty-free movement among the FTA members. See on this
feature, Kala Krishna and Anne Krueger, “Implementing Free Trade Areas: Rules of Origin and Hidden
Protection”, in Jim Levinson, Alan V. Deardroff, and Robert M. Stern (eds), New Directions in International Trade
(Ann Arbor, MI, University of Michigan Press, 1995), pp. 149, 150–151.
 TRADE LAW, POLITICAL ECONOMY AND RULES OF ORIGIN 177

The determination of origin does not present special difficulties when the product
is wholly produced in one state. Unfortunately, with the increasing trend that has been
labelled as the “global factory”,25 most final products in contemporary international
commerce involve factors of production from more than one country; well-known
examples are computers and automobiles. In such cases, rules of origin are designed to
identify which of the states involved is the “originating state”. The general principle
widely accepted in international trade law is that the state where the “last substantial
process”, or “sufficient working or processing”, has been carried out—is the
originating state.26
The principle of the “last substantial process” is vague and leaves wide discretion to
national customs authorities. This feature generates an undesirable situation of
uncertainty and undermines predictability for traders. Three additional tests are employed
to define more precisely the general principle: (i) a domestic content test, requiring a
minimum percentage of local value-added in the originating state (or setting the
maximum percentage of value originating in non-member states); (ii) a technical test,
prescribing that the product must undergo specific processing operations in the
originating state; and (iii) a change in tariff classification, requiring the product to change its
tariff heading under the Harmonized Commodity Description System (Harmonized
System) in the originating state.27 These techniques are further discussed below.

IV. ROO AS A STRATEGIC TRADE INSTRUMENT

As analysed above, ROO are primarily designed to facilitate trade liberalization
through reciprocal arrangements. This method is widely implemented through the
conclusion of preferential agreements28 that are intended to allow trade concessions
only to the contracting parties, while maintaining existing barriers towards non-
contracting parties. It is important to note here that ROO are certainly not designed to
raise trade barriers towards third states, beyond those barriers existing prior to the

25 On this trend, see Jacques H.J. Bourgeois, “Rules of Origin: An Introduction”, in Edwin Vermulst,

Paul Waer and Jacques Bourgois (eds), Rules of Origin in International Trade (Ann Arbor, MI, University of
Michigan Press, 1994), pp. 1, 4–5.
26 The term “last substantial process” is often used in non-preferential contexts (e.g., the WTO Agreement

on Rules of Origin) and the term “sufficient working or processing” is widely used in preferential agreements;
see, e.g., with regard to EC preferential agreements, Paul Waer, “European Community Rules of Origin”, in
Edwin Vermulst, Paul Waer, and Jacques Bourgois (eds), Rules of Origin in International Trade (Ann Arbor, MI,
University of Michigan Press, 1994), pp. 85, 146.
27 See on these tests in detail, John H. Jackson, The World Trading System (2nd edn, Cambridge, MA, MIT

Press, 1997), pp. 167–169; Edwin A. Vermulst, Rules of Origin as Commercial Policy Instruments—Revisited,
26 J.W.T. 6 (December 1992), 61, 63–74; Joseph A. LaNasa III, Rules of Origin and the Uruguay Round’s Effectiveness
in Harmonizing and Regulating Them, 90 American Journal of International Law (1996), 625, 629–636.
28 It should be emphasized here that global agreements (such as the WTO agreements) are also considered as

“preferential arrangements” in this sense, since trade preferences included in such agreements are accorded only to
products manufactured in the contracting states.
178 JOURNAL OF WORLD TRADE

establishment of the reciprocal regime.29 As for the trade flow between the contracting
parties themselves, ROO are not intended to affect the volume of trade in favour of
one of the partners to a preferential regime.30
In reality, however, ROO often fall prey to protectionist pressures.31 ROO are
increasingly employed as an instrument to attain two principal (and complementary)
goals:
(1) Increasing trade barriers towards non-contracting states; and,
(2) Attracting investment into the markets of the contracting parties.
1. Increasing trade barriers towards non-contracting states: The main objective here is to
increase the consumption of local factors (materials and labour) through restriction of
access of third parties’ suppliers into the preferential market, beyond the level existing
prior to the reciprocal arrangement. The apparent motive of this move is the desire to
“compensate” local manufacturers for losses that are expected to arise following the
implementation of trade liberalization towards the other contracting parties.
Setting more restrictive ROO generates an enhanced incentive for local producers
to employ factors of production originating in the territories of the contracting states,32 at
the expense of foreign suppliers.33 We have to remind ourselves that, generally, as more
local materials and processes are employed in the manufacturing of a product, the
likelihood of meeting the origin requirements increases. Thus, the inclusion of more

29 This issue is also one of the essential preconditions to the establishment of FTAs or customs unions under

Article XXIV(4) of the GATT; see, e.g., Jackson, as note 27 above, pp. 65–67; on the economic rationale for
Article XXIV, see Jagdish Bhagwati, “Regionalism and Multilateralism: An Overview”, in Jaime de Melo and
Arvind Panagariya (eds), New Dimensions in Regional Integration (Cambridge, Cambridge University Press, 1995),
pp. 22, 25–28.
30 See, e.g., E. Ivan Kingston, “The Economics of Rules of Origin”, in Edwin Vermulst, Paul Waer and

Jacques Bourgois (eds), Rules of Origin in International Trade (Ann Arbor, MI, University of Michigan Press, 1994),
p. 7.
31 See, e.g., the statement made by Lawrence: “The major abuses perpetrated by the emerging regional

arrangements relate to their use of rules of origin and antidumping provisions.” Robert Z. Lawrence,
“Regionalism and the WTO: Should the Rules be Changed?”, in Jeffrey J. Schott (ed.), The World Trading System:
Challenges Ahead (Washington, DC, Institute of International Economics, 1996), pp. 41, 52.
32 The terms “local” and “domestic” refer here to the territories of the contracting states, and “foreign”

refers to the territories of non-contracting states. This terminology is based on the assumption that the preferential
arrangements include rules of either “bilateral cumulation” or “multilateral cumulation”. Cumulation rules allow
each party to the arrangement to use factors of production originating in the territories of the other contracting
parties without infringing upon the ROO. See, e.g., Article 404 of the North American Free Trade Agreement
(NAFTA), 32 International Legal Materials (1993), 289. In the absence of such cumulation rules, the above effects
of ROO operate only with regard to the territory of each contracting party. For a detailed analysis of various
techniques of cumulation, see Moshe Hirsch, Asymmetric Factor Endowments, Progressive Rules of Origin, and
Commercial Cooperation in the Middle East (Working Paper, Kohl Center for European Studies, The Hebrew
University, 1998), pp. 15–22. On the cumulation rules in the EC preferential agreements, see Hans-Joachim Priess
and Ralph Pethke, The Pan European Rules of Origin: The Beginning of a New Era in European Free Trade,
34 Common Market Law Review (1997), 772, 782–786; Nicholas A. Zaimis, EC Rules of Origin (London,
Chancery Law Publishing, 1992), pp. 175–214.
33 On this impact of ROO, and its inefficient consequences (in terms of reallocation of resources) in detail,

see Moshe Hirsch, The Asymmetric Incidence of Rules of Origin: Will Progressive and Cumulation Rules Resolve the
Problem?, 32 J.W.T. 4 (August 1998), 41, 44–45.
 TRADE LAW, POLITICAL ECONOMY AND RULES OF ORIGIN 179

stringent ROO in a preferential agreement generates a greater incentive for producers to

use more local materials and intermediate components.34
2. Attracting investments into the contracting parties’ markets: Manufacturers outside the
preferential area who face more stringent origin requirements may either purchase
more “local” factors (see above), or change their investment strategy and shift their
production lines into the preferential market. The transfer of production into the
territories of contracting states often enables the “foreign” producer to comply with
the new ROO requirements. As ROO become more restrictive, the greater is the
incentive for foreign producers to transfer their production processes into the
preferential market area.
As discussed below, ROO are occasionally employed as a strategic instrument to
increase local sourcing and attract investments. Three principal factors explain which
settings are more susceptible to strategic use of ROO.

THE VARIABLES AFFECTING THE STRATEGIC USE OF ROO

The extent of the incentive to increase local sourcing and attract investors by
restrictive ROO is dependent upon three principal variables:
1. The extent of the gap between trade preferences accorded under the alternative trade
arrangements: Foreign producers assess the gap between the trade concessions granted
under the alternative arrangements available to them. The alternative trade
arrangements may take the form of state legislation, bilateral or regional FTA, or global
preferential arrangement. If, for instance, the importing state’s unilateral legislation
provides for a zero-tariff rate for imported products manufactured in all states, the
incentive to change either sourcing or investment patterns (in order to comply with
the alternative arrangement) is very low.35 If, on the other hand, the importing state’s
legislation provides for a 100 percent tariff rate, and the reciprocal agreement provides
for a zero-tariff rate, the incentive for foreign suppliers to change patterns of sourcing
or investment is much greater.
2. The size of the preferential market: Generally, the larger the preferential market
(in terms of purchasing power), the greater the incentive for foreign suppliers to bear

34 The above negative effects of ROO upon foreign suppliers are similar to those that are generally generated

to third parties by the establishment of preferential arrangements in general. This is the well-known effect of
“trade diversion” in favour of preferential arrangements’ parties. It should be emphasized that the extent of the
diversion in favour of the contracting parties is dependent, inter alia, on the level of restrictiveness of the ROO included
in a particular preferential arrangement. Thus, excessive ROO increase the negative impacts of preferential
agreements for manufacturers located in the territories of third parties. For an analysis of the economic effects
of preferential arrangements for third parties, see James C. Ingram and Robert M. Dunn, International Economics
(3rd edn, Wiley & Sons, 1993), pp. 163–169; Jagdish Bhagwati and Arvind Panagariya, The Economics of Preferential
Trade Agreements (Washington, DC, AEI Press, 1996), p. 7. For the impact of preferential trade arrangements
on the world trading system, see Michael J. Trebilcock and Robert House, The Regulation of International Trade
(2nd edn, London, Routledge, 1999), pp. 129–134.
35 In such a case, however, other NTBs may still be relevant.
180 JOURNAL OF WORLD TRADE

additional costs involved in changing sourcing or investment patterns to comply with

the new ROO.
3. The gap between production costs under the alternative patterns of production: Foreign
producers assess the gap between the production costs involving factors originating
outside of the preferential area and production costs with factors from within
preferential area. The same assessment is made when a foreign producer considers
whether to shift its production line to the territories of the contracting states or not.36
Generally, the smaller the gap between production costs, the greater the incentive to
employ more factors from the preferential area or to transfer the production process
into that area.37
In the light of the important role of variables (1) and (2), it is no surprise that the
parties that are most widely reported to employ ROO as a strategic instrument are the
North American Free Trade Agreement (NAFTA) and the EC member states. These
major economic blocs are prominent in terms of both the remarkable size of their
markets and the extent of trade concessions offered by them to manufacturers.
Numerous cases of employing ROO as an instrument of protectionism are
documented in international trade literature and we shall briefly mention here only a
few cases regarding the practices of these economic blocs.
The ROO of NAFTA were shaped with the intention of increasing local
sourcing with respect to tomatoes and textiles. The ROO regarding tomato ketchup
in NAFTA are more stringent than those included in the former Canada–US Free
Trade Area Agreement (FTA). The apparent aim of this change was to increase the
share of Mexican tomato producers in the US market, at the expense of their
competitors from Chile.38 The ROO regarding textiles and apparel in NAFTA are
more restrictive, with the intention of encouraging Canadian and Mexican textile
manufacturers to use costlier US fabrics, instead of less expensive Asian ones.39
The EC Commission changed the ROO applying to photocopiers in 1989 with
the apparent intention “to target” the Ricoh producers in the US. Exports from the
Ricoh plant in the US significantly increased following the imposition of anti-
dumping duties by the Community on imported photocopiers from Japan. The new
ROO essentially described the operations carried out by the Ricoh producer in the
US, and provided that such operations do not confer US origin. Consequently,
36 These calculations should also take into account the costs of transferring production in the case of shifting

the production line into the preferential area, and transportation costs in the case of production outside the
preferential area.
37 Here it is also necessary to examine the administrative costs involved in compliance with ROO (e.g.,

the costs of providing appropriate documentation to determine origin). Krishna and Krueger, as note 24 above,
p. 157, n. 16; Waer, as note 26 above, p. 158; Stephenson and James, Rules of Origin and the Asia-Pacific Economic
Cooperation, 29 J.W.T. 2 (April 1995), 77, 89.
38 David Palmeter, “Rules of Origin in Regional Trade Agreements”, in Paul Demaret, Jean-Francois Bellis

and Gonzalo Garcia Jimenez (eds), Regionalism and Multilateralism After the Uruguay Round (Brussels, European
Inter-University Press, 1997), pp. 341, 343–345.
39 Joseph A. LaNasa III, Rules of Origin under the North American Free Trade Agreement: A Substantial

Transformation into Objectively Transparent Protectionism, 34 Harvard International Law Journal (1993), 381, 397–399.
 TRADE LAW, POLITICAL ECONOMY AND RULES OF ORIGIN 181

photocopiers produced in the US were considered as originating in Japan, and they

were subject to anti-dumping duties.40
As for changing investment strategies, ROO proved an effective tool to attract
foreign investments in the practice of the EC and NAFTA. The ROO of the EC
regarding semiconductors became more stringent in 1989, apparently at the behest of
the European semiconductor producers. Following this change, investment in the
semiconductor manufacturing facilities in the EC dramatically increased.41
The ROO of NAFTA regarding colour televisions were planned to attract
television tube production into the NAFTA area. As described by Jensen-Moran:
“The notion behind the NAFTA rule was to rationalize North American production
by attracting television tube production—the source of the highest-paid jobs in the
industry—in North America, while allowing assembly elsewhere”.42 Indeed, these
ROO attracted major foreign investments in the North American tube industry.43
The above-mentioned reports of employing ROO as a tool of protectionism are
supported by the results of a recent statistical research project. The research project
examined the interaction between trade liberalization and the level of restrictiveness of
ROO in NAFTA. The extent of liberalization (or, conversely, protectionism) was
measured by the length of the tariff phase-out programmes prescribed by the
agreement, i.e., the number of years that each party is bound to fully eliminate its tariffs
with the other NAFTA members.44 The statistical results revealed that the degree of
tariff liberalization among the NAFTA members is highly and significantly correlated
with the degree of restrictiveness of ROO: sectors with more restrictive ROO are also
the sectors with longer phase-out periods for tariff liberalization.45

V. EXPLAINING THE GROWING USE OF ROO AS A STRATEGIC INSTRUMENT:

THE PRINCIPAL FACTORS
The above section shows that ROO are increasingly employed as an instrument
of protectionism. Identifying the factors underlying this trend may assist us in devising
better legal mechanisms to decrease the strategic use of ROO and promote
liberalization in this sphere.

40 Vermulst, as note 27 above, pp. 66–67; Anna Murphy, The European Community and the International Trading

System, Vol. II (Brussels, Center for European Policy Studies, 1990), pp. 50–51.
41 Murphy, ibid., pp. 49–50; Jeri Jensen-Moran, Trade Battles as Investment Wars: The Coming Rules of Origin

Debate, 19 The Washingtonian Quarterly (1995), 239, 242–243; Rene Schowk, US–EC Relations in the Post-Cold
War Era: Conflict or Partnership (Boulder, CO, Westview Press, 1991), pp. 101–102; Norio Komuro, “International
Harmonization of Rules of Origin”, in Philip Ruttley, Iain MacVay and Carol George (eds), The WTO and
International Trade Regulation (London, Cameron May, 1998), p. 86.
42 Jensen-Moran, as note 42 above, p. 244.
43 See the impressive figures cited in Jensen-Moran, ibid., p. 245.
44 Antoni Estevadeordal, Negotiating Preferential Market Access: The Case of the North American Free Trade

Agreement, 34 J.W.T. 1 (February 2000), 141, 151.

45 Ibid. at 160–161. The author concludes at p. 161: “In other words, borrowing the language of the

endogenous protection literature, one could conclude that the same forces that push for tariff protection also push
for more restrictive ROO.”
182 JOURNAL OF WORLD TRADE

A. THE “LAW OF CONSTANT PROTECTIONISM” (OR THE DISPLACEMENT EFFECT)

The first reason for the growing employment of ROO to restrict trade seems to
lie in what Bhagwati termed “The Law of Constant Protectionism”. According to this
law:
“If you reduce one kind of protection, another variety simply pops out elsewhere. (You then
have a Displacement Effect, not evidence of any increase in protectionism pressure).”46
The basic model of political economy (presented in section II) provides a rigorous
explanation for the creation and impact of domestic demand for protectionism. This
demand is not completely removed whenever a reciprocal agreement directs parties to
reduce or eliminate some trade barriers. When one route of protection is restricted or
blocked, the demand for protection is rather channelled to other available routes. The
“displacement effect” was also confirmed by a statistical study that focused on the
interaction between the employment of tariffs and non-tariff barriers (NTBs).47
Viewing excessive ROO as an NTB, we are able to conclude that the
displacement effect also operates in the realm of ROO. As tariffs have been intensely
reduced in the recent GATT/WTO rounds, and the resort to various NTBs has been
significantly curtailed over the last two decades, restrictive ROO are increasingly
needed as a substitute for traditional trade barriers.

B. INFORMATION ASYMMETRY
The second factor that explains the pervasive tendency to employ ROO as a tool
of protectionism is information asymmetry. Political economy studies show that
policy-makers are inclined to prefer trade protectionist measures that are less
transparent. Regularly, NTBs are not immediately discernible by the “losers” from
protectionism policies, and the extent of the incurred losses is less detectable.48 The
employment of less transparent trade measures decreases the likelihood of opposition to
these measures by other segments of the population.
Trade protectionism instruments are often formally published and available to the
public, but the phenomenon of “rational ignorance” explains the practical difficulties
to grasp this data. As explained by Hillman:
“A transparency explanation of [means of protection] relies on sustained rational ignorance for
information asymmetry to persevere. Rational ignorance can be sustained by sufficiently
complex administrative procedures for the provision of protection.”49

46 Bhagwati, Protectionism, as note 17 above, p. 53; see also Mansfield and Bush, as note 13 above, p. 734.
47 The authors of the study found considerable evidence of an inverse relationship between the employment
of tariffs and NTBs. Consequently, they concluded that “tariffs and NTBs seem to be substitutes”; Mansfield and
Bush, as note 13 above, pp. 739–740.
48 Hillman, as note 2 above, pp. 73–74.
49 Ibid.
 TRADE LAW, POLITICAL ECONOMY AND RULES OF ORIGIN 183

Hillman illustrates the phenomenon of “rational ignorance” by a reference to US

trade laws, and offers the example that “dumping is defined by 300 lines of text in the
antidumping act plus 1000 Federal Register lines of administrative regulations”.50
The factor of information asymmetry well explains the widening strategic
employment of ROO. Most ROO are formulated in an extremely complex and
technical form. Though ROO are formally accessible to the public in most states, their
level of complexity often requires special expertise to assess their impact upon a
particular sector of the economy. Practically, ROO and their economic impact are not
comprehensible for most citizens, journalists, and policy-makers. The statement of the
Canadian Trade Minister before the Canadian parliament regarding NAFTA’s ROO
well-illustrates this factor:
“Rules of origin are very, very complex. You don’t want to know about them. They are
terrible things to deal with.”51
The feature of asymmetry exists in this sphere because the technical content of
ROO and their restrictive impact are hardly known to the public, but they are well
known to experts within the interested industrial sectors, as well as to the policy-
makers who prescribe them.

C. LAX LEGAL NORMS

The third factor that accounts for the widening strategic employment of ROO is
the lack of effective legal norms to restrain this activity. The regulation of ROO under
WTO auspices is still in its infancy stage, and the initial steps were taken only in the
recent Uruguay Round. The 1994 WTO Agreement on ROO52 provides that the
mandate of the Committee on Rules of Origin, which deals with harmonization of
ROO on the global level, is restricted to non-preferential arrangements.53 Consequently,
the only provision that disallows, albeit vaguely, the employment of ROO as an
instrument of protectionism54 does not apply to preferential ROO.55
As Hoekman and Kostecki state on this omission:
50 Ibid.
51 As cited in John P. Simpson, North American Free Trade Agreement—Rules of Origin, 28 J.W.T. 1 (February
1994), 33.
52 Agreement on Rules of Origin and the Common Declaration with regard to Preferential Rules of Origin,

in The Results of the Uruguay Round of Multilateral Trade Negotiations (Geneva, GATT, 1994), p. 241. On the 1994
Agreement on Rules of Origin, see Edurne Navarro Varona, “Rules of Origin in the GATT”, in Edwin
Vermulst, Paul Waer and Jacques Bourgeois (eds), Rules of Origin in International Trade (Ann Arbor, MI, University
of Michigan Press, 1994), pp. 355, 359–363; LaNasa, Rules of Origin and the Uruguay Round, as note 27 above,
pp. 635–639; Trebilcock and House, as note 34 above, pp. 127–128. On the work of the WTO Committee on
ROO following the conclusion of the 1994 Agreement, see Philippe G. Nell, WTO Negotiations on the
Harmonization of Rules or Origin: A First Critical Appraisal, 33 J.W.T. 3 (June 1999), 45.
53 See Article 1(1) of the Agreement on Rules of Origin, ibid.; Komuro, as note 41 above, pp. 100–108.
54 Article 2(b) of the Agreement on Rules of Origin provides that the contracting parties are not allowed to

use “their rules of origin … as instruments to pursue trade objectives”. And Article 2(c) provides that the member
states are not permitted to use ROO to “create restrictive, distorting, or disruptive effects on international trade”.
55 The above prohibition (cited in the former note) is not included in the Common Declaration with Regard

to the Preferential Rules of Origin.

184 JOURNAL OF WORLD TRADE

“Rules of origin have been problematical mostly in the context of preferential trade
agreements: exactly the arena where WTO rules do not apply. This was no oversight, and
reflects the fact that many countries did not want to see constraints imposed on their policy
freedom with regard to regional integration or the mechanics of trade preferences for
developing countries.”56
In the absence of adequate rules to prohibit strategic use of ROO in preferential
arrangements, and in light of the vague principles regarding the use of ROO in non-
preferential arrangements (e.g., state legislation), it is not surprising that the WTO legal
regime hardly restrains the strategic employment of ROO.
To sum up this section, the factors of the displacement effect, information
asymmetry and lax legal norms, which characterize current developments in this
sphere, indicate that the strategic employment of ROO is likely to increase in the
future. The expected increase of distortive effects generated by this accelerated trend
calls for a reform of the WTO regime on ROO.

VI. LIBERALIZING ROO: A PLEA FOR A REFORM

Having ascertained the major factors underlying the increasing employment of

ROO as an instrument of protectionism, we are now equipped to approach the task of
devising some methods for dismantling this relatively new trade barrier. The insights
gained from political economy analysis will assist us to suggest adequate techniques to
attain this goal. First, we should remind ourselves of the well-known postulations of
international trade theory regarding the harmful outcomes of trade protectionism.
Generally, trade restrictions harm both the domestic economy and other trading
partners.57 These negative effects arise from any form of trade barrier, including
restrictive ROO. The losses generated by restrictive ROO call for the adoption of
new strategies “to liberalize” ROO. This process has already been initiated within the
WTO in 1994 but, as clarified above, it is still in its formative period.58
In light of the pervasive employment of ROO as a tool of protectionism, the first
thought might be to completely abolish ROO. Such a proposal is untenable since it
ignores the essential function of ROO and their role in the furtherance of trade
liberalization.59 The hypothetical suggestion to eliminate ROO is tantamount to a
proposal to disallow reciprocal trade arrangements. An effective legal mechanism to
address the problems arising from the operation of ROO should strike a balance
between the competing needs of the international trading system to operate ROO as a
differentiating mechanism while restraining their strategic use as an NTB.
Drawing on the analysis presented in Section V, the two principal factors that explain
the growing increase of strategic employment of ROO are the “displacement effect” (i.e.,
56 Hoekman and Kostecki, as note 20 above, p. 104.
57 See, e.g., Harry P. Bowen, Abraham Hollander and Jean-Marie Viaene, Applied International Trade Analysis
(London, Macmillan, 1998), pp. 4–5, 86–89; Ingram and Dunn, as note 34 above, pp. 37–72.
58 See Section V.
59 See Section III.
 TRADE LAW, POLITICAL ECONOMY AND RULES OF ORIGIN 185

the trend to substitute tariffs by NTBs) and information asymmetry. The global
endeavour to liberalize ROO should operate, it is submitted, in the opposite direction.
Liberalizing ROO should involve the promotion of two complementary processes:
increasing transparency and gradual reduction of trade restrictions generated by ROO.

A. TARIFFICATION: UNVEILING THE EXTENT OF PROTECTION

As discussed above, the factor of information asymmetry is of major importance to
the pervasive strategic employment of ROO.60 Every rule of origin generates some
incentive to employ local materials and, consequently, every origin requirement accords
some protection to local producers.61 Yet, different ROO accord different levels of
protection to different sectors. The essential information regarding the extent of the
protection accorded by ROO to a particular sector is regularly obscured by complex and
technical rules that are practically incomprehensible to the public and to most experts. To
enable an effective process of liberalization in this sphere, ROO should disclose the
extent of protection accorded to a particular product in measurable units.62
Furthermore, it is highly desirable that all trading parties employ the same scale to
measure the extent of restrictiveness of various ROO. The existence of a single scale
will enable policy-makers to compare between the level of protection provided by
particular ROO in various trade arrangements. Current ROO use three principal
methods to determine the origin of goods: the domestic content test, the technical test
and change in tariff classification (“tariff-shift test”),63 and various combinations
thereof. The employment of three distinctive tests to determine origin virtually
prevents a comparison of the extent of restrictiveness of ROO included in various
bilateral, regional and global arrangements.
The need for a uniform scale of measurable units that transmits the extent of
protection accorded by ROO leads us to the conclusion that the most desirable
method for determining origin is the domestic content test. Local content rules are
based on a percentage criterion that enables measurement and comparison. ROO that
employ the tariff-shift and technical tests rarely disclose the level of restrictiveness
involved in these rules and they do not allow an effective comparison of the extent of
protection accorded by them to various sectors.
The process of converting tariff-shift and technical tests into local content
percentage rates is equivalent to the process of “tariffication” prescribed by the 1994
Agreement on Agricultural Products.64 Parallel to the conversion of various NTBs into

60 See Section V.
61 See in detail on this impact of ROO, Hirsch, The Asymmetric Incidence of ROO, as note 33 above, p. 44.
62 Revealing this information may in itself constitute a trigger to the building of some pressure upon policy-

makers to reduce the extent of protection accorded to a particular sector.

63 See Section II.
64 Articles IV, V and Annex 5 of the 1994 WTO Agreement on Trade in Agricultural Products, in The

Results of the Uruguay Round of Multilateral Trade Negotiations (Geneva, GATT, 1994), p. 39. On this agreement, see
Trebilcock and House, as note 34 above, pp. 259–264.
186 JOURNAL OF WORLD TRADE

tariffs in the sphere of agricultural trade, we suggest converting a myriad of technical

and tariff-shift origin requirements into domestic content percentage rates.
Admittedly, the local content test has its own limitations (as does any other
method for determining origin),65 but it is clearly the most desirable method for
liberalization in this sphere. A detailed comparison between the advantages and
disadvantages of each test to determine origin exceeds the limits of this article and we
shall only briefly address here the bias of these methods in favour of protectionist
interests.
Tariff-shift and technical tests share the advantage of a clear statement of
individual rules, but as mentioned above, they do not disclose the extent of protection
granted to each sector. As for the tariff-shift test, it is noteworthy that there is no single
rule that determines whether the change of two-digit, four-digit or six-digit levels will
confer a new origin on a product. Similarly, technical tests do not provide for a single
technical requirement to be applied to all goods. In the absence of a uniform criterion
for determining origin in each of these tests, trade agreements and regulations adopt a
myriad of complex tests to determine the origin of goods.66
The combination of the discretion left to states to determine a particular test
of origin for each product, and the problem of information asymmetry inherited in
tariff-shift and technical tests, well explain why these tests are so susceptible to be
captured by protectionist interest groups.67 Hence, our conclusion is that the test of
domestic content is preferable as a primary method to liberalize trade in this domain.68

B. GRADUAL REDUCTION OF LOCAL CONTENT RATES

Once the process of converting various ROO into measurable local content rules
(“tariffication”) is complete, it is then possible to embark upon a process of gradual
reduction of local content rates. The proposed process of domestic content reduction
may be perceived as parallel to the ongoing process of tariff reductions within the
GATT/WTO system, but it is important to note that the final targets for these two
parallel processes are certainly not the same. While the goal of the tariff-reduction
process is generally a zero-tariff rate, the target of the domestic content reduction of
ROO should not be zero. A zero local content percentage is tantamount to the

65 See, e.g., LaNasa, as note 27 above, pp. 632–633.

66 See, e.g., Palmeter, as note 38 above, pp. 344–347.
67 See, e.g., Palmeter, as note 38 above, p. 347, and the examples described therein.
68 This conclusion does not rule out any resort to the Harmonized System for the purposes of origin

determination. One of the main advantages of the tariff-shift test is that it is based upon the Harmonized System,
which provides an almost universal framework for the determination of origin in international trade. It is
important to note, however, that trade agreements that expressly adopt the tariff-shift test as the primary method
to determine origin (such as NAFTA and the EEA) employ, in reality, the local content test in numerous cases.
Consequently, it is possible to employ the Harmonized System as an overall framework to organize the numerous
origin requirements. Still, the analysis made in the text above directs us to the conclusion that it is highly desirable
that the concrete origin requirements, included in the Harmonized System or in any other framework, employ the
local content test.
 TRADE LAW, POLITICAL ECONOMY AND RULES OF ORIGIN 187

abolition of ROO, and as discussed above, this is certainly not a desirable goal for the
world trading system.69
The statement that local content rates included in ROO should not be reduced to
zero does not mean that there should be no target for the process of local content
reduction. The selection of a local content target is neither an easy nor a precise task,
and different scholars and policy-makers may have different views on this issue. Still, it
is clear that the target rate should allow ROO to function as an effective differentiating
mechanism while minimizing the strategic employment of these rules as a trade barrier.
A survey of domestic content rules included in various trade agreements and
non-preferential regulations reveals that most local content rates are within the range
of 35 percent to 62.5 percent.70 While the highest rate (62.5 percent) is considered
to be excessively restrictive, the lower rate (35 percent) appears to fulfill its stated
aims, i.e., to avoid “free riding” by third parties.71 The author of this study is of the
view that the desirable target for the process of reducing domestic content rates
should be within the range of 35 percent to 40 percent, and 45 percent in
exceptional cases. This rate, it is submitted, is likely to enable ROO to function as a
differentiating mechanism while minimizing the distortive effects resulting from
their employment.

C. PROGRESSIVE RULES

The proposed maximal local content rates to be included in future ROO should
not necessarily be the same for products originating in all states. Analysis of the
economic impact of ROO reveals that local content rules generate asymmetric
restrictive effects for different states. States with higher labour costs are in a better
position to comply with local content tests. States with low-labour costs (often
developing states) are in a relatively inferior position, and their capability to comply
with the same domestic requirements is lower. The same unequal outcome results
from different prices of materials in different states. Thus, the application of the same
local content rates to all states tends to discriminate against developing states for which
one of their primary comparative advantages is cheap labour and materials.72
69 See the discussion at the first part of Section VI.
70 See the surveys in Vermulst, as note 26 above, pp. 82–86; Waer, as note 25 above, pp. 149–151; Stephenson
and James, as note 36 above, pp. 85–87; Palmeter, as note 37 above, pp. 349–351. See also, LaNasa, as note
38 above, pp. 399–400; Tim McNamara and Edwin Vermulst, Special Trade Law Issues in the EC for Assembly
Products, 28 J.W.T. 4 (August 1994), 83, 87–89; William E. James, APEC and Preferential Rules of Origin: Stumbling
Blocks for Liberalization of Trade?, 31 J.W.T. 3 (June 1993), 113, 126–127; Zaimis, as note 31 above, pp 43–45;
Komuro, as note 40 above, pp. 88–98; Allan S. Galper, Restructuring Rules of Origin in the US-Israel Free Trade
Agreement, 19 Fordham International Law Journal (1996), 2028, 2042–2043, 2055–2067.
71 The rate of 62.5 percent is applied to certain automobiles under NAFTA and is considered “highly

restrictive”; LaNasa, as note 26 above, p. 399; on the (protectionist) process that led to the establishment of this
rule, see pp. 399–402. The 35 percent rate is provided for in the 1985 Israel–US FTA, in various US assistance
programs (e.g., the GSP and Caribbean Initiative Basin), and in South Korea’s legislation; Galper, as note 69 above,
pp. 2055–2058, 2065–2067; Vermulst, as note 26 above, p. 88; Komuro, as note 40 above, p. 98.
72 LaNasa, as note 26 above, pp. 633–634; Stephenson and James, as note 36 above, pp. 85–87; Zaimis, as

note 31 above, p. 46.

188 JOURNAL OF WORLD TRADE

In addition, the size of the factor endowment pool (raw materials, labour, etc.)
within the territory of each state has a major bearing upon its capacity to fulfill the
origin requirements. Generally, the greater the factor pool available to a party within
its territory, the fewer factors it is required to import in order to manufacture products
for export. Consequently, a party with a larger factor endowment pool is less
constrained by the operation of rules of origin, and is in an advantageous starting
position in its trade with parties that have a smaller pool.73
The asymmetric effects of local content ROO suggest that different local content
rates should be assigned to different states, corresponding to their relative production
costs and the size of their factor endowment pools.74 Under such a progressive regime,
higher local content rates will be assigned to products originating from the party with
higher production costs and/or a greater factor pool; and lower local content rates will
be assigned to products originating from the party with lower production costs and/or
a smaller factor pool.
The establishment of progressive local content rates is likely to lead to a more
balanced and equitable global regime on ROO.

VII. CONCLUSION
The increasing employment of ROO as a strategic trade instrument and the
ensuing distortive effects pose a significant challenge to the current efforts to liberalize
international trade. This alarming development calls for a reform of the embryonic
WTO regime on ROO. The preceding sections demonstrate that the combination of
political economy analysis and international trade law is a valuable tool to cope with
this challenge and further trade liberalization
Political economy analysis was employed in this article to discern the essential
functions of ROO in international trade and to identify the critical factors underlying
the increasing use of these rules as NTBs. The factors of the “displacement effect”,
“information asymmetry”, and lax legal norms, which characterize current
developments in this sphere, indicate that the existing negative effects resulting from
the strategic use of ROO are likely to intensify in the future. This article shows that
legal mechanisms that draw upon the insights gained by political economy analysis may
significantly decrease the resort to ROO as a strategic instrument to restrict trade.

73 For an in-depth analysis of the asymmetric impact of ROO, see Hirsch, as note 31 above, p. 45.
74 The size of the factor pool available to each party is not easily measurable. Still, the existence of a
substantial gap is noticeable in numerous settings (although not precisely measurable). This is the case, for instance,
with regard to trade agreements between most states and the European Community or the US. For a
comprehensive analysis of the measurement and impact of factor endowments upon patterns of trade, see Edward
E. Leamer, Sources of International Comparative Advantage: Theory and Evidence (Cambridge, MA, MIT Press, 1984),
pp. 90–94, 220–236; Edward E. Leamer, “Measures of Openness”, in Robert E. Baldwin (ed.), Trade Policy Issues
and Empirical Analysis (Chicago, University of Chicago Press, 1988), pp. 147, 179–199; H. Bowen, E. Leamer and
L. Sveikauskaus, Multicountry, Multifactor Tests of the Factor Abundance Theory, 77 American Economic Review
(1987), 791, 793–794.
 TRADE LAW, POLITICAL ECONOMY AND RULES OF ORIGIN 189

The legal reform called for in this article involves the processes of “tariffication”
(through local content rules that indicate the level of protection), gradual reduction of
domestic content rates (up to a certain target rate), and progressive origin
requirements. These suggested measures, if adopted, are likely to strengthen the WTO
regime on ROO and will constitute a significant contribution to the furtherance of
international trade liberalization.
Finally, the combination of political economy and international trade law may
constitute an important tool to further liberalization in other spheres of international
trade as well. Equipped with concepts and models of political economy, international
trade lawyers may explore better legal mechanisms to liberalize trade in other
domains that are susceptible to protectionism, such as government procurement and
anti-dumping.