# **5.1 Benchmark Specification**

Table 3 reports OLS estimates of equation (5), which compares changes in imports to each Spoke country from countries outside the PECS cumulation zone (RoW) to those from the rest of the Spoke countries. Columns (1) and (3) include only the IO-RoO Indexes (weighted and simple) controlling for importer and for exporter time-variant characteristics. Columns (2) and (4) include the differences in the change of tariffs, as described in Section 3.2. The coefficients of both the simple and weighted average IO-RoO indexes are negative and significant. This suggests that diagonal cumulation reduced imports of intermediate goods of Spoke countries from non-participating countries relative to the other Spoke countries that joined the cumulation zone in the period under analysis. Our preferred measure, weighted IO-RoO, has the largest coefficient. The coefficient of the change in tariff, ∆ _τj_ , is always negative and significant. This confirms that the change in preferential tariff reduced Spokes imports from non-participating countries and instead increased Spokes’ imports from PECS countries.

Table 3: PECS and change in imports from RoW and Spokes

|Dep Var:||Change in log Imports:|RoW and other Spokes||
|---|---|---|---|---|
||(1)|(2)|(3)|(4)|
|weighted IO-RoO_j_|-0.112***<br>(0.008)|-0.137***<br>(0.016)|||
|IO-RoO_j_|||-0.064***<br>(0.012)|-0.083***<br>(0.021)|
|∆_τj_||-3.836***<br>(0.649)||-3.942***<br>(0.656)|
|Observations|120,568|26,204|120,568|26,204|
|R-squared|0.078|0.114|0.077|0.112|
|Importer FE|Yes|Yes|Yes|Yes|
|Exporter FE|Yes|Yes|Yes|Yes|

_Notes_ : OLS estimation. The dependent variable is the difference between changes in log imports of intermediate j from nonparticipating countries between 1995 and 2002, and the corresponding change of imports from the rest of Spoke countries, ∆ _impj,srow −_ ∆ _impj,ss_ . ∆ _τj_ is the change in preferential tariff (where we use the applied MFN in case of missing preferential tariff information). IO-RoO _j_ and weighted IO-RoO _j_ represent our simple and weighted average measures of the restrictiveness in RoO respectively. Importing countries include: Czech Republic, Estonia, Hungary, Lithuania, Latvia, Poland, and Romania.

Tables 4 and 5 propose OLS estimates of equation (5) using alternative control groups. Table 4 shows changes in imports of intermediate _j_ of each Spoke country from the RoW compared to changes in imports from the EU15. Similarly to table 3, columns (1) and (3) include only our IO-RoO Index (weighted and simple), controlling for importer and exporter time-variant fixed effects. Columns (2) and (4) include the differences in the change of tariffs. The coefficients of both the simple and weighted average IO-RoO indexes are positive and significant, with the exception of the simple average IO-RoO index which loses significance when tariffs are not controlled for. These results suggest that diagonal cumulation increased imports of intermediate goods of Spoke countries from non-participating countries relative to the EU15. The mechanism behind this result relates to the fact that rules of origin in general do not require that products must be fully obtained within the cumulation zone to qualify for preferential access. Therefore, diagonal cumulation could have enlarged the set of countries from which it was possible to cumulate inputs for obtaining originating status. Specifically, it may have led exporting firms in Spoke countries to reassess sourcing decisions in favor of 16