Divergent Integration

Focusing on non-tariff measures that can constitute barriers to trade and that differ between free-trade agreements (FTAs) and customs unions, this paper investigates the role of rules of origin in restricting market access for nations excluded from a customs union. The authors develop a simple general equilibrium model characterised by trade in intermediate and final products and use this to examine the implications of binding the role of rules of origin in an FTA on market outcomes and the welfare of agents in the economy. They highlight the phenomenon of "induced trade diversion" where the role of rules of origin can result in countries losing from preferential market access.

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