The estimates in Table 4 indicate the difficulty of coming up with plausible estimates of the costs of RoO, whether one relies on parametric or non-parametric methods. For example, how should one interpret the number of requests for preferential status in rows 8 and 9 when tariff preferences are nil? Negligible administrative costs?. Or if administrative costs are non-negligible, then neither should one observe requests for preferential status when preferential margins are low, here assumed to be<sup>τ</sup> _i_<sup>=</sup> 3% .<sup>9</sup> In any case, even if there is much heterogeneity in the data, administrative costs are not negligible, justifying the proposal to do away with origin requirements for preferential margins below an amount around 5%.

# <u>Market power</u>

To get a handle on the welfare effects of RoO, one has to factor in the rent element associated with preferences and their distribution between the exporting and importing country. This implies estimating the pass-through effect of tariffs on consumer prices (i.e. the extent to which preferences translate into a higher producer price for exporters). Olarreaga and Özden (2005) for AGOA preferences, and Özden and Sharma (2006) for CARICOM preferences estimate that between one-third and one half of tariff reductions are passed on to producers. However, part of the border price increase could just reflect an increase in the complying costs discussed above. Cadot et al. (2005) link the pass-through effects of preferences to Mexican producers in the Textiles & Apparel sector under NAFTA directly to rules of origin, and show that once one takes into account RoO, the pass-through effect falls from 80% to about 50%. They also show that US producers of intermediates are able to retain a substantial share of the rents generated by Mexican tariff preferences. They conclude that in North-South PTAs where the preferential margin in the Northern partner are rather low, it is likely that RoO are less a development tool to prevent screwdriver assembly than a circuitous way of raising the profits of upstream producers by creating a captive market for them in partner countries.

At this stage, AFTA integration has been mostly geared towards supplying products to the outside world, so the rent transfer associated with preferential access has not been an issue. However, as preferential access is bound to increase with the current FTAs under negotiation involving Japan and Korea with AFTA members, protectionist pressures will increase. A pattern of vertical trade along the lines described here would then be likely to emerge between the richer and poorer members in the PTA and the distribution of rents might be mostly tilted towards the more developed partner.

# **4. Value Content Rules and Preference Utilization: Estimates from the EU Preferential Market Schemes**

Currently AFTA has a VC rule. How restrictive is this rule, and how might utilization rates react to a change in the VC rate from the current maximum limit of 60% for non-originating imports to a lower (or higher) rate? We draw here on the EU data to estimate what these effects might be. As explained below, because of the great

> `9` Using threshold estimation techniques, Manchin (2004) estimates for the same data that

> preferential status is not asked when<sup>~~τ~~</sup> _i_ < 3 − 4%

``` 12 ```