Rules of origin and Korea's use of free trade agreement

Abstract

Eliminating tariff barriers has been one of the principal strategies to meet the economic and political goals of Free Trade Agreements (FTAs). Since the late 1990s,the contribution of FTAs to reducing trade barriers has exceeded expectations due to the proliferation of such agreements. However, doubts have emerged regarding this contribution, since parties to FTAs often opt not to make use of the preferential tariffs of FTAs, resulting in a significant difference in the utilization rates between FTAs, countries, and industries. Previous studies have explained these differences by pointing to the regulatory or administrative burdens imposed by the Rules of Origin (RoOs). However, studies of the influences of RoOs on the use of FTAs are limited both in scope and methods used, and have rarely been conducted from an administrative perspective. The purpose of this research is to redress this gap and further explain the effects of RoOs on FTAs focusing on the administrative procedures of RoOs. By doing so, it aims to help customs administrations facilitate trade and rationalize FTA compliance management procedures. This is of particular importance in terms of providing the knowledge necessary for regulators to understand the administrative policy impact on FTA usage. This study has focused on Korea as a case study, by examining firms eligible to use FTAs. The causal relationship between RoOs and firms’ use of FTAs was investigated for the 295 firms that responded to a comprehensive survey. Three hypotheses on the relationship have been assessed; First, the influence of the restrictiveness of RoOs on firms’ use of FTAs; second, the influence of the complexity of RoOs on firms’ use of FTAs, and; third, the influence of the uncertainty of RoOs on firms’ use of FTAs. The results indicate that these three variables of RoOs have a statistically significant relationship with firms’ FTA usage. Four major observations emerge from this study. First, to mitigate the restrictiveness of RoOs, the study identifies a need to rationalize the way in which firms may satisfy the rules relating to inputs. Second, this study highlights the regressive nature of RoOs and the undue regulatory compliance burden placed on smaller firms. Third, the study suggests that information assistance for firms will result in longer-term voluntary compliance with RoOs. Finally, the research suggests the need to improve administrative procedures in order to increase the certainty of RoOs in relation to information exchanged among firms. The research highlights the importance of sharing benefits among firms under FTAs, with the key role of regulators being to make FTAs genuinely beneficial for a country. Equally, it points to the need to avoid trade deflection and to address the potential for duty avoidance. In doing so, the research emphasizes that administrative reform is no less important than statutory reform in achieving the economic and political goals of FTAs.

Date of Award	2015
Original language	English
Supervisor	David Widdowson (Supervisor) & Chris Aulich (Supervisor)