produced in the region, at least for the computer hard-disk example shown in his Figure 8. However, the very high import content of exports for the Asia region shown in Figure 2 suggest that AFTA utilization rates could be low under the present VC limit.

To drive home the importance of trade in intermediates, consider the following example recalling that Japan is not currently a member of AFTA. According to the Asian input-output data provided in Baldwin (2006, Table 1), for all the middleincome countries (Indonesia, Philippines, Malaysia, Thailand), on average 35%- 40% of intermediates are sourced from outside the AFTA group. Take then an activity with a 10% value-added (this value-added Figure is consistent with the deepening of interindustry flows) and 40% intermediates non-originating. Then, originating value for this activity would be, 64%. But for activities where 60% of materials would be nonoriginating, originating value would fall to 46%, barely above the stipulated 40% minimum requirement stipulated under AFTA. One might also note that, in the case of the EU, the preference rate for tariff lines where a value-content only criterion is used is lower than for the other tariff lines (see Table 5) .

Returning to the EU and US PTAs, the rather low utilization rates for relatively high preference margins suggests that restrictive PRSO could be the culprit. Indeed, it could well be that more restrictive PSRO are applied to the tariff lines with the highest preferential margins. To see if this is the case, we use an ordinal restrictiveness index that takes values in the range 1 ≤<sup>_r_</sup> _i_ ≤ 7 with increasing values corresponding to a more restrictive rule.<sup>8</sup> Though not amenable to quantification like effective rates of protection, the R-index is intended to play the same role as an effective rate of protection: indicate the restrictiveness that must be met by a product to obtain originating status. Table 3a shows that tariff lines with tariff peaks (tariffs lines three times or more the average tariff) that is tariff lines where preferential margins are the highest do indeed have a higher value for the R-index than those with low tariffs. This is the case for both NAFTA and the EU.

The conclusion from this first look at preferential margins and utilization rates is that, even for non-negligible preferences, utilization rates can be quite low, and that PSRO are, at least partly, designed to discourage the use of preferences. This is particularly true for the T&A sector where multiple criteria are the norm.

Once more, one might ask how relevant these observations are for AFTA. At this stage almost all intra-ASEAN trade is in ‘middle-products’ (see Sanyal and Jones (1982), the final product being sold to the outside world. But the picture would change rather dramatically with the proposed FTAs between Japan and AFTA members and between Korea and other AFTA members. Then, the resulting pattern of trade would be closer to the one currently observed between the US and the EU and their Southern trading partners. Here, differences in endowments matter with the

> `8` The index was first proposed by Estevadeordal (2000) for NAFTA. The construction of the R-index is illustrated in the appendix and discussed in further detail in Cadot et al. (2006).  In addition to the inevitable arbitrariness involved in setting up the observation rule, the R-index has other shortcomings. In particular, it does not control for the degree of preferences and for the characteristics of the different activities: satisfying a CTC involving a CH for intermediate activities is likely to be easier than if it is to be satisfied for a final good activity.  Finally, it is an ordinal rather than cardinal measure. For a description of some of the shortcomings of the R-index, see Erasmus et al. (2006).

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