Dispensing with NAFTA Rules of Origin? Some Policy Options for Canada

Increased market access from Free Trade Agreements (FTAs) promised by policy makers is often diluted by preferential rules of origin (ROO). This paper discusses two policy options -one direct, and one indirect -with regard to limiting the impact of NAFTA ROO on trade, and illustrates the impact on GDP and welfare of these options using a computable general equilibrium methodology. The first (direct) option, moving toward a North American Customs Union (CU) instead of the current NAFTA, would basically eliminate the need for preferential ROO among members of the CU. The second (indirect) policy option is to pursue multilateral trade negotiations and reduce MFN tariffs towards zero. In this context, NAFTA ROO would lack both relevance and impact, even if they remained “on the books”, because tariff preference utilization among NAFTA members would virtually disappear. The current stalemate at the WTO Doha round suggests that a North American CU remains a serious policy option. However, the erosion of NAFTA tariff preferences since the phase-in of the Uruguay round has also reduced the distortionary impacts of NAFTA ROO, somewhat limiting the gains that a CU could bring.