member country as if the materials were originating in the country where the processing is undertaken.<sup>3</sup> However, since the domestic content can be an aggregate of value-added in any ASEAN member state, AFTA provides in effect for full cumulation although, as noted by Brenton (2006), the rules stipulate that the final stage of manufacture must be carried out in the exporting member state (what constitutes ‘the final process’ is not defined). Because vertical linkages and outsourcing are very important in Asia (see below), full cumulation relaxes considerably the requirements of satisfying origin. Thus under full cumulation, the more developed higher labor cost countries can outsource labor-intensive, low-tech, production stages to less developed lower-wage partners whilst maintaining the preferential status of the good produced in the low-cost locations.

Table 1 tabulates the criteria used for PRSO under PANEURO and NAFTA. It shows that the two regimes use a large list of criteria. These typically include technical requirements (such as the triple transformation requirement in textiles and apparel which requires that apparel must be woven from originating fabric and from originating yarn). The criteria also include exceptions and allowances. NAFTA relies more heavily on a change of tariff classification (CTC), though often accompanied by other criteria. PANEURO relies mostly on a VC and on the Wholly obtained (WH) criterion (this criterion is not used in NAFTA since Mexicans export far fewer agricultural exports than GSP and ACP countries).

The key issue is how RoO affect the utilization of preferences (i.e. do importers end up using the MFN status when preferences would suggest they should claim for preferential status)? Table 2 and Figure 1 show average utilization rates computed for different thresholds of minimum preferential margins for NAFTA and for the two EU preferential schemes, the Generalized system of preferences (GSP) for which ASEAN countries (except Singapore qualify) and the Cotonou preferences which benefit the former colonies of the Africa, Caribbean and Pacific (ACP) regions.<sup>4</sup> Since there are administrative costs (see below), only utilization rates above 4% are considered in Table 2 which also shows in parenthesis the number of tariff lines over which utilization rates are computed.

As a reference, the average preferential margin (computed over tariff lines with positive tariffs) was 4.5% for NAFTA (almost all tariffs had been eliminated on NAFTA trade by 2001), 2.4% for GSP-eligible countries and 4.6% for ACP countries (not eligible for EBA status). EU data is for 2004, when 62% of trade for GSP-eligible countries took place at zero tariffs and over 80% for ACP countries (some ACP also benefiting from EBA status at zero tariffs in the EU market).

Several patterns stand out. First, utilization rates by Mexican exporters are systematically higher than for the EU than under GSP. This could reflect several factors including closer proximity and knowledge of the US market, but also less stringent RoO rules or greater administrative costs for EU schemes than for NAFTA

> `3` See the appendix for a definition of bilateral, diagonal and full cumulation.

> `4` The reason for distinguishing between GSP and ACP utilization rates is that ACP preferences have been in effect longer, that all tariff lines qualify for ACP status, that some GSP-eligible countries also qualify for EBA but have chosen not to use the more favorable status, perhaps because these preferences were only in effect since 2002 or finally because of slightly more stringent regime-wide rules for GSP-eligible countries than for ACP countries. Also all AFTA countries except Singapore qualify for GSP status.

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