The European Union's reform in rules of origin and international trade: Evidence from Cambodia

Abstract

The European Union (EU) has unilaterally granted developing countries preferential access to EU markets under the Generalized System of Preferences (GSP). To obtain preferential access, exporters in beneficiary countries must follow the rules of origin (ROO) in the EU’s GSP. Previous ROO were criticised as restrictive, because exporters’ production costs increase with a restriction on imported inputs from the lowest‐cost third countries and the administrative process of proving origin. The EU simplified the restrictive ROO on January 1, 2011. However, the impact of the EU’s reform on beneficiary economies remains largely unexplored. This paper estimates the causal impact of simplifying ROO on garment exports in a beneficiary country, Cambodia, during the period 2007–2015. In the new ROO, garment exporters in least developing beneficiaries such as Cambodia can use imported fabric from any third country and still maintain preferential access. I adopt a difference‐in‐differences method and provide evidence to support the parallel trends assumption. The results show that garment exports to the EU increased by 112% after 2011, which coincided with a sharp increase in textile imports from China to Cambodia. Foreign direct investment inflows increased sharply after 2011 in the garment sector but decreased in the textile sector.

Rules of origin and trade preference utilization among least developed countries

“…4 The lack of empirical attention paid to rules of origin in the economic literature range from their perceived banality (Augier et al, 2005), to their legal complexity . 5 Apparel products accounted for 61.0% of the total exports to EU requesting preferential access in 2010 (Tanaka, 2021). 6 Habib finds that 65% of apparel firms source knit textiles locally, while only 15% source woven textiles locally.…”

“…In 2011, the EU relaxed the local content requirement for a number of products, including for apparel products—an important export sector for LDCs—covered under the EBA 5 . Given that the EU's EBA is a unilateral program, the timing and structure of the rules of origin revision were primarily outside of the control of any individual firm or LDC (Tanaka, 2021). The rules of origin for the GSP were not revised, meaning non‐LDCs still must satisfy the local content requirements for apparel products.…”

“…5 5 Apparel products accounted for 61.0% of the total exports to EU requesting preferential access in 2010 (Tanaka, 2021). …”

“…10 10 Tanaka (2021) analyzes how the EU's rules of origin reform influence Cambodian exporters, but does not analyze preference utilization rates. Sytsma (2019) analyzes how Bangladesh apparel firms responded to the EU's rules of origin reform and briefly discusses utilization rates.…”

Metatheoretical Issues of the Evolution of the International Political Economy

“…Despite the scientific value of elaborating the methodological problems of world economic system evolution (Amin 1996;Cotula 2012;Cyfert et al 2021;Dalevska et al 2019;Dossani and Kenney 2007;Dasgupta et al 2021;De Bièvre and van Ommeren 2021;Dzwigol 2021;Galiani et al 2019;Garrett 2006;Geels 2005;Elbahnasawy and Ellis 2022;Elbe and Long 2020;Fuchs 2007;Gilpin 1987;Graham and Tucker 2019;Graz et al 2020;Hussain et al 2020Hussain et al , 2021Huang 2010;Fossung et al 2021;Keohane and Nye 1977;Kharazishvili et al 2020Kharazishvili et al , 2021aKharazishvili et al , 2021bKravchenko 2019;Kurowska-Pysz and Szczepa ńska-Woszczyna 2017;Kuzior et al 2020;Las Heras 2018;Levitt 1983;Marlin-Bennett and Johnson 2021;Medeiros 2021;McNally 2012;Nunn and Shields 2022;Paterson 2021;Postlewaite and Schmeidler 1986;Shkodina et al 2020;Simmons and Zachary 2004;Smith and White 1992;Smirnova et al 2021;Stiglitz 2002;…”