Rules of Origin Liberalization with Multi-Product Firms : Theory and Evidence from Bangladeshi Apparel Exporters

This paper investigates how rules of origin influence firm-level export behavior. Rules of origin specify the minimum amount of local content required for a product to qualify for reduced tariffs under a preferential trade agreement. Rules of origin undermine exporting firms' access to preferential trade agreements in countries where there exist limited opportunities to source intermediate inputs locally. I show that liberalizing rules of origin in a multi-product firm setting not only affects input sourcing decisions and preference utilization rates but also product output mix. I study the 2011 revision to the rules of origin associated with the EU's Generalized System of Preferences. This revision allowed apparel producers in least-developed countries to use more internationally-sourced content in apparel exports. Using transaction-level data on Bangladeshi apparel firms, and a triple-difference empirical framework, I find the 2011 rules of origin revision resulted in an increase in export revenue, product diversification, export-participation, and product quality. At the industry level, the most productive incumbent firms gained market share after the rules of origin liberalization