RTAs for Development: Utilizing Territoriality Principle Exemptions under Preferential Rules of Origin

This paper examines how preferential rules of origin that operate under Regional Trade Agreements (RTA) can be utilized to help developing countries. Under the standard territoriality principle, products imported from countries outside of a RTA territory will be treated as non-originating. A rigid application of the rules can lead to a denial of origin for products even if considerable portions originate from the RTA country or even if they are substantially transformed within the RTA country. This pressures manufacturers to move production locations away from countries that are not parties to a RTA. The flow of trade and investment face distortions and ultimately the economic interests of non-RTA countries can be thwarted. Due to their economic vulnerability, developing countries will bear a considerable burden of such shifts in production. In this paper, we show how outward processing provisions in several recently adopted RTAs can serve as a means to overcome the problems that arise out of strict application of the territoriality principle and thus help developing countries.