The last three columns report results for a smaller sample including only tariff lines with preference rates exceeding 5%. While the pattern of signs is unchanged, coefficient values often vary by a large margin, suggesting that the estimates are not very stable. Concentrating on the estimated effects of a change in the maximum regional content from 60% to 50%, one gets the plausible result that utilization rates are less sensible to a change value content rate at tariff lines with higher preference rates.

As a final exercise, the bottom of the Table estimates what utilization rates would be for preferential rates in ACFTA. Chinese and Philippine average MFN tariff rates (row 13 and 15) are used to proxy for the extent of likely preferential market access for ASEAN exports into China and the Philippines, or vice-versa. In this illustrative simulations, the VC is set to the AFTA level (40% in row 12), which is likely to be the VC rate under ACFTA. Results of this simulation are reported on rows 14 (China) and 16 (Philippines) at the bottom of Table 6. As expected, predicted utilization rates are higher when using the Chinese MFN tariff, which is more than twice higher than the Philippine one.

Because of the very different pattern of trade between the EU and its GSP and ACP partners and the ruling patterns of trade in AFTA, it is difficult to conclude whether these ex-ante simulated utilization rate responses to changes in VC and in preferential margins could be used as guides to the likely effects under AFTA. Furthermore, the estimated coefficients values are sensitive to the choice of controls, and the estimates were only carried over the sample of tariff lines where the VC was the only criterion used to determine origin. Therefore, it is probably best to retain from the exercise that utilization rates could be quite sensitive to changes in VC requirements and preferential margins.

# **5.  Lessons from NAFTA and the EU PTAs**

In any preferential trading arrangement (PTA) short of a Customs Union, RoO are necessary to prevent trade deflection. Typically, the vast majority of PTAs use three methods to establish if sufficient transformation or substantial transformation has taken place: (i) change of tariff classification; (ii) a critical threshold for value-added; and (iii) specific manufacturing processes. The EU and the US use these three methods often relying on multiple requirements at the product level. Taken together, the evidence from the US and EU experience suggests that RoO have indeed restricted access because RoO have been designed to protect sectors in the EU and the US that would be most affected by preferences. Overall, RoO have been more restrictive than would have been necessary to satisfy the sufficient transformation criterion, with as a consequence low utilization rates in sectors like T&A where preferential margins were usually high.

The more detailed evidence on the costs of the PSRO in NAFTA and the EU suggests that administrative costs are likely to be non-negligible (though one observes positive imports in tariff lines with zero or small tariff preferences). Distortionary costs created by RoO have even proven harder to quantify, although the low rates of utilization in the textiles and apparel sector attest to their presence. Econometric evidence also shows that, after controlling for the preference margin, utilization rates are lower in sectors characterized by multiple RoO requirements. The econometric evidence also suggests that in the textiles & apparel sector where vertical linkages are ``` 15 ```