in the EU FTA to changes in imports among Spoke countries. Differently from Conconi et al. (2018), we exploit an index developed by Cadot et al. (2005) to measure the restrictiveness of rules of origin applied to final goods to which an intermediate good contributes. This index is used to evaluate the effects of PECS, introduced in 1997, which facilitated imports from the EU peripheral countries (Spokes) compared to the RoW. Indeed, based on this strategy, we show that imports of intermediates from the RoW compared to imports from Spoke countries declined following the introduction of diagonal cumulation under the PECS. We find that the magnitude of this decline is positively associated with the extent of the restrictive RoOs applied to the associated final goods.

Finally, owing to the nature of the experiment, we also exploit other control groups and try to disentangle trade creation from trade diversion effects in intermediate goods. Switching from bilateral to diagonal cumulation can boost trade in intermediates thanks to the fact that diagonal cumulation provides new sourcing possibilities compared to the initial FTA agreements characterized by more stringent (“bilateral”) rules of cumulation. On the one hand, this happens because firms in Spoke countries may now be able to exploit preferential tariffs and enter into the EU export market as diagonal cumulation expands sourcing possibilities. On the other hand, it might reflect the fact that exporting firms in Spoke countries change their supply chain linkages, by substituting intermediates from EU countries with cheaper intermediates coming from countries that joined the cumulation zone after 1997. In this latter case, since rules of origin in general do not require that products must be fully obtained within the cumulation zone to qualify for preferential access, 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 the rest of the world, rather than the EU. To assess these mechanisms, we consider two alternative changes in Spokes’ imports. First, we examine changes in Spokes’ imports of intermediates from the RoW to changes in imports from the EU15. Our results show that diagonal cumulation reduced imports of intermediate goods from the EU15 vis-`a-vis RoW. Second, we consider changes in imports from Spokes themselves to changes in imports from the EU15. Similarly, we find that diagonal cumulation reduced imports of intermediate goods from the EU15 vis-`a-vis the Spoke countries. These additional results highlight that Spokes countries reorganize their production process towards the Spokes themselves and RoW, and away from EU15. The magnitude of these effects continues to be positively associated with the extent of the restrictive RoOs applied to the associated final goods.

Our findings confirm the predictions of recent theoretical literature that looks at the role of preferential regimes on sourcing decisions. A strand of theoretical research has shown that FTAs can potentially lower trade costs if the benefits from preferential access outweigh the costs of fulfilling RoOs and RoCs, therefore affecting a firm’s sourcing decisions. Demidova et al. (2012) build a heterogeneous firm setting which shows that firms sort according to the export markets and the different types of trade policy. They model the response of Bangladesh firms in two sectors, the woven and non-woven sectors, with respect to the decision to export to the EU market under the “Everything But Arms” (EBA) initiative, and to the US market 4