Improving Preferential Market Access Through Rules of Origin

In countries where there exist limited opportunities to source inputs locally, rules of origin undermine access to preferential trade agreements for final-goods exporters. I analyze the 2011 revision to the rules of origin associated with the EU's Generalized System of Preferences, which allowed apparel producers in least-developed countries (LDCs) to use internationally-sourced textiles in exported products. Using transaction-level data on Bangladeshi apparel firms, I find the rules of origin effectively cut the preferential margin by three-fourths. Liberalizing the rules of origin resulted in firm-level revenue growth, which was driven by the intensive margin through increased shipment sizes and quality up-grading.