Countries have more opportunities than ever to increase trade, support economic growth, and build international partnerships. However, many developing countries struggle to unlock the full potential of free trade agreements (FTAs) due to restrictive rules of origin (RoO). Establishing a strategic approach to determining whether a product qualifies for preferential tariff treatment (i.e., product-specific rules [PSRs]) is critical for public sector authorities looking to protect local industries while promoting exports.
International trade has evolved significantly, driven by expanding global trade routes, consumerism, and economic integration. This evolution, accompanied by a rise in FTAs, was pursued as a means of stimulating economic growth and diversity, enhancing competitiveness, lowering import costs, attracting investment, and strengthening strategic alliances (see Figure 1).
Although some FTAs have proven effective, growing protectionism is limiting the impact. A key example is the recent tariffs introduced by the US, which reflect a global trend in which countries increasingly favor protecting their markets over free trade. As a result, FTAs are being redefined, with RoO becoming a central mechanism to boost exports while imposing tighter controls on imports.
FTAs often focus on trade in goods, which is essential for removing tariffs and trade barriers and provides immediate economic benefits. A key element is RoO, which determine a product’s “nationality” to ensure only goods originating from FTA member countries benefit from preferential treatment.
RoO promote fair trade by preventing non-member countries from circumventing tariffs and are particularly important for products with global supply chains, especially as identifying the origin of goods produced across multiple locations becomes more complex. The main types of RoO include:
In the context of FTAs, RoO significantly impact the benefits of liberalization. These rules either grant preferential treatment and market access (if originating) or hinder tariff privileges (if non-originating). Thus, well-designed, product-specific RoO are crucial for a successful FTA, ensuring exports gain a competitive edge rather than remaining underutilized.
For instance, if Country A grants Country B immediate liberalization for product X, but Country A’s customs determine insufficient value-add in Country B, the product is deemed non-originating. Consequently, FTA benefits become void, blocking preferential treatment. This illustrates RoO’s dual role:
Balancing these roles is vital for developing countries seeking to expand exports while protecting emerging industries. Poorly designed RoO can undermine the intended liberalization of FTAs, leading to suboptimal results.
The ASEAN-India Trade in Goods Agreement, effective from 1 January 2010, aims to reduce and eliminate duties on 76.4% of goods traded between India and ASEAN (Association of Southeast Asian Nations) member countries. This FTA boosted bilateral trade from US $40 billion in 2009 to $102 billion in 2023, a 250% increase. However, closer examination of the trade data reveals another reality, one in which the benefits of the FTA are far from balanced. India has criticized aspects of the agreement, particularly the RoO, which are seen as outdated and restrictive for Indian exports while allowing rerouted products with low ASEAN value-add. These concerns have contributed to an increasing trade deficit (see Figure 2), leading to stricter enforcement measures like CAROTAR 2020 (Customs [Administration of Rules of Origin under Trade Agreements]) and prompting India to seek an agreement revision in 2024.
The RoO for the automotive sector under the USMCA (US-Mexico-Canada Agreement), effective since July 2020, replaced those in NAFTA (North American Free Trade Agreement), aiming to boost US production, investment, and job creation. One significant update was increasing the RVC requirement from 62.5% under NAFTA to 75%, making it harder for Canadian and Mexican exporters to qualify for tariff reductions. As a result of strict regional value-add requirements, light vehicle imports from Canada and Mexico to the US declined, and the percentage of dutiable imports rose significantly (see Figure 3). While the latter was taking place, US exports of light vehicles to USMCA members climbed from $27.2 billion to $30 billion by 2022. This shows how the revised RoO incentivized US exports to meet the RVC requirements while restricting the import of light vehicles from other members.
The new RoO also led to supply chain adjustments, with Canadian and Mexican manufacturers localizing more of their production to meet the stricter requirements. Investments in vehicle manufacturing surged from $1.8 billion in 2018 to $11 billion by 2022, nearly a six-fold increase, indicating that the long-term benefits of complying with the new RoO outweigh the costs of non-compliance (see Figure 4).
As developing countries aim to boost exports of competitive products to new markets and protect nascent industries from overwhelming imports, balancing RoO criteria is essential. In particular, nascent industries need a scientific approach to defining PSRs and aligning them with the ambitious objectives of developing nations.
Successful development of RoO and PSRs is complex. Arthur D. Little (ADL) created a six-step framework as outlined below to help developing countries maximize the benefits of preferential trade agreements by boosting exports while leveraging RoO to protect sensitive and nascent industries.
The foundation of effective PSR negotiations lies in the availability and reliability of data covering all products under consideration. This data should be easily available to the negotiation team through adequate digital tools (e.g., Excel, database, data warehouse, or data lake) to enable informed decision-making. The data should include key metrics and data points collected for both parties of a trade agreement, such as:
Collaboration with local experts and stakeholders is essential for gathering and analyzing this information. The resulting data-driven assessment helps companies compare product competitiveness, understand supply chain complexities, and determine feasible RoO for exporters.
Using collected data, assessment of product competitiveness comes from analyzing value chains, production processes, and material origins. This helps countries quantify localization potential, compare it against the trade partner, and identify which party has the advantage in local value addition and product transformation. The analysis also reveals which party is better positioned to meet PSR requirements.
Identifying products eligible for preferential treatment is straightforward: these are the products covered by the trade agreement and liberalized by the market-access offer. These products are subject to reduced tariffs if they meet the RoO criteria. Upon identifying relevant products, the exercise shifts to prioritizing two categories of liberalized products:
Products with dual objectives are targets for local production and are a key focus for exporting activities.
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