A New Approach for Quantifying the Costs of Utilizing Regional Trade Agreements

This study proposes a new approach for quantifying two kinds of costs related to the utilization of regional trade agreements (RTAs). The first, which we call the “procurement adjustment cost,” represents the cost involved in meeting rules of origin through the adjustment of procurement sources. The second is the additional fixed costs required to utilize RTAs, including document preparation costs for the certification of origin. The proposed approach makes it possible to compute these two costs separately using product-level data. It is built on a model of international trade where heterogeneous exporters decide which tariff scheme to use. Applying our approach to Thailand’s imports from China, our estimates suggest that procurement adjustment costs to comply with RTA rules of origin at the median are equivalent to 4% of per-unit production costs. In addition, RTA utilization requires an additional 27% of fixed costs. Furthermore, simulation analysis shows that a reduction of the additional fixed costs by half would raise the RTA utilization rate by 13 percentage points, while the complete elimination of procurement adjustment costs would raise the RTA utilization rate by 32 percentage points.