Trade Preference Utilization Post-Brexit: The Role of Rules of Origin

Abstract

The degree to which firms make use of preferences in exporting to a partner country under a Free Trade Agreement will in good part depend on the restrictiveness of the underlying Rules of Origin (ROOs). Focusing on the post-Brexit Trade and Cooperation Agreement (TCA) signed by the United Kingdom and the European Union, we examine how access to zero preferential tariffs has been impacted by ROOs. We do so by constructing a ROO restrictiveness index which varies across products. We find that the TCA has an overall moderate degree of ROO restrictiveness. Using product-country level trade data, we find that preference utilization under the TCA has risen over time, and exhibits a positive correlation at the product level with the EU Common External Tariff. Regressions on the determinants of preference utilization indicate that more restrictive ROOs are associated with a lower degree of preference utilization by UK firms in the EU market and this effect is more evident for consumption goods. Preference utilization is also driven by the size of the preferential margin, the size of the trade flows, and the extent to which exports are undertaken by producers as opposed to distributors, as well as the degree of firms' engagement in value chains.