After promising last year to terminate US participation in the North American Free Trade Agreement (NAFTA), President Donald Trump has opted for renegotiation in several areas, including in the “rules of origin” chapter. Caroline Freund examines those rules of origin to determine whether they need to be tightened to prevent foreign goods from using NAFTA trade preferences or loosened to improve efficiency. Freund finds NAFTA rules of origin are strict and highly complex, as compared with rules in other free trade agreements. Tightening them could perversely lead to lower regional content in final goods and disrupt regional supply chains, as more importers eschew NAFTA preferences because of costly rules of origin and instead trade under standard most favored nation tariffs. Given the complexity of the NAFTA rules of origin, Freund argues in favor of streamlining rules, with regional content requirements for all goods set at one rate, as opposed to the current product-by-product rules in NAFTA.
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