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Protective Effects of Rules of Origin on Supply Chains: Empirical Evidence from Korean FTAs

Author Yang Jooyoung et al Date 2020.12.30 Page
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This study investigates the changes in Korea’s regional supply chains resulting from the major FTAs that Korea has concluded and provides policy implications. Previous studies mainly focused on the economic impacts from reducing tariffs by concluding FTAs. However, preferential rules of origin also play an import role in addition to tariffs, especially where the production process is fragmented since these rules ultimately decide which goods will benefit from preferential tariffs.

 

Using an expanded and refined methodology of Conconi et al. (2018), which codifies preferential rules of origin of NAFTA, we quantify the level of sourcing restrictions on intermediate goods which is transferred from rules imposed to final goods in the Korea-USA, Korea-EU, and Korea-China FTAs. Using quantified RoO of these three FTAs, in addition to trade and tariff data, we analyze the effects of rules of origin with triple difference methodology. Exploiting cross-country and cross-product variation in treatment over time, we show that RoO in Korean FTAs do not provide incentives to final goods producers for changing their sourcing decision to FTA partner countries.