Learning to use trade agreements

The administrative costs associated with "rules of origin" is one of the critical reasons why benefits of trade agreements remain underutilized by exporters. For instance, the utilization rate of trade agreements by Indian exporters is as low as 25 per cent. Rules of origin designate a product's origin in order to determine whether the product qualifies for preferential tariff rates under a particular trade agreement. With the rise in number of free trade agreements (FTAs), these rules are increasingly becoming complex, and thereby, raising the cost of utilizing FTAs. Thus, understanding rules of origin is imperative for effective utilization FTAs.

This study by Kala Krishna et. al. sheds light on the costs associated with rules of origin, exploiting the long history of preferential trade agreements in Latin America. The key findings of the study are as follows:

1. As the exporters' experience, in complying and utilizing trade agreements increase, the cost of utilization of trade agreements fall significantly.

2. Large firms, with greater experience, are more likely to utilize trade agreements, thus benefitting more from FTAs, as compared to small firms.

3. Policies, that encourage the use of trade agreements early-on, should be targeted at new exporters, with little or no experience with rules of origin. This will raise both their current as well as the future utilization of FTAs.