Assessing the effect of NAFTA's rules of origin

Abstract

In the last decade or so, a voluminous literature (see e.g. de Melo and Panagarya, 1992; Bhagwati and Panagaryia, 1996; Frankel, 1997; or Bhagwati, Krishna and Panagariya, 1999, and references therein) has attempted to assess the implications of Preferential Trading Arrangements (PTA) for trade patterns, global welfare, and the multilateral trading system. If this literature has yet to converge to an unambiguous answer as to whether PTAs are, in a second-best world, good or bad for world welfare, the theoretical arguments are by now fairly clear (see e.g. Bhagwati and Panagariya, 1999). By contrast, the empirical evidence is still scant. In particular, one basic question remains largely unanswered: to what extent do PTAs really improve market access for member countries, in particular for smaller ones in asymmetric blocs? The answer is less obvious than it looks. Notwithstanding the fact that GATT Article XXIV, para. 8 (b) requires the removal of tariff barriers on “substantially all trade” inside Free-Trade Areas, non-tariff measures can create significant barriers to intrabloc trade.