Political Cleavages over GVCs: Rules of Origin and Preferential Liberalization

• In Event: Global Value Chains (GVCs) and Global Economic Orders

Abstract

Rules of origin (RoO) are one of the core policy provisions used by countries to restrict the depth of liberalization in preferential trade agreements (PTAs). Despite the economic importance of RoO in global supply networks, the previous political economy literature has a limited understanding of firm preferences over the design of these rules. In this paper, I offer a theory of firm preferences over RoO. Specifically, I argue that the structure of global supply networks and reliance on specialized inputs drives firm preferences over the design of RoO by affecting the price of preferential access. Contrary to existing literature, my argument suggests that political cleavages over the design of RoO emerge between large firms within a given industry. To test this theory, I create a dataset on firms' position-taking over the design of RoO in US trade agreements. I show that intra-industry divisions over RoO are driven by differences in global supply chains. Moreover, I show that the structure of firms' supply networks and the reliance on specialized inputs are the key determinants of preferences toward RoO. Firms with strong (weak) regional connections to the PTA market are more likely to prefer restrictive (permissive) rules. Overall, this study challenges the new conventional wisdom in the political economy literature by illustrating how large productive firms use RoO to narrowly carve-out liberalization while also blocking competition.

Author

• Dillon Laaker, University of Wisconsin, Madison