Rules of Origin and Deflections of Trade and Production

Abstract

A free trade area, unlike a customs union, which by definition has a common external tariff, needs to devise rules of origin so that deflections of trade may be avoided. Without origin requirements, goods would enter the free trade zone where the tariff is lowest and proceed, free of duty, to where the tariff is higher. While there can be few objections to this from a theoretical point of view, one of the practical attractions of a free trade area for governments is the compatibility of a certain amount of economic integration with the retention of sovereignty over tariff policy. If deflections of trade were permitted, only the lowest tariffs in the free trade area would be operative, and this sovereignty would be entirely symbolic.