Estimating the Impact of Cumulative Rules of Origin on Trade Costs: An Application to Mega-regional Free Trade Agreements in the Asia-Pacific Region

Abstract

We investigate the effects of free trade agreements (FTAs), focusing on the impact of cumulative rules of origin (ROO) on trade costs. Using a gravity regression model, we estimate the effect of various cumulative ROO systems on the measured trade costs. We apply these estimates to static and capital accumulation computable general equilibrium models to compare the effects of mega-regional FTAs in the Asia-Pacific region—namely, the Regional Comprehensive Economic Partnership (RCEP), Comprehensive and Progressive Trans-Pacific Partnership (CPTPP), and Free Trade Areas in the Asia-Pacific (FTAAP). We find that mega-regional FTAs may not be a viable alternative to a multilateral trading system or bilateral FTAs unless less restrictive cumulative ROO are adopted. Successful FTAs depend on an appropriate cumulative ROO provision system rather than their membership expansion. © 2022 by the Asian Economic Panel and the Massachusetts Institute of Technology.