| Abstract: | This paper analyses the impact of rules of origin on patterns of trade in the context of the pan‐European system of diagonal cumulation. The paper first highlights the importance of rules of origin in all preferential trading arrangements while arguing that those rules can easily lead to trade suppression and/or trade diversion. We then focus on the introduction of the pan‐European system in 1997 and show evidence to suggest that the introduction of the system materially impacted on trade between the EU, and its CEFTA, EFTA and Baltic states partner countries. The main body of the paper then empirically explores the impact of the lack of cumulation in the textile industry on the countries of the Southern Mediterranean. The results suggest that rules of origin may indeed substantially constrain trade between non‐cumulating countries, possibly by as much as 70–80 per cent in aggregate. While preferential trading agreements thus serve to increase intra‐PTA trade through the liberalisation of trade barriers, they may also be doing so by effectively raising external barriers to trade through the use of constraining rules of origin. To the extent that they do so increases the likelihood of trade diversion and trade suppresion. |
