Determinants of FTA Utilization for Japan's Imports: Preferential margins and restrictiveness of rules of origin

This paper examines determinants of free trade agreement (FTA) utilization for Japan's imports in 2015, focusing on preferential margins and restrictiveness of rules of origin (ROOs). First, the paper descriptively investigates features of FTA utilization for Japan's imports, using finely disaggregated data that allow us to identify imports under each FTA scheme. The paper also investigates features of ROOs in Japan's 12 FTAs by FTA and by product. We then focus on preferential margins and ROOs' restrictiveness to quantitatively analyze the determinants of FTA utilization on Japan's imports, considering most-favored-nation (MFN) tariffs and non-tariff measures (NTMs). Our quantitative analysis demonstrates that restrictive ROOs in Japan's FTAs lower the FTA utilization rate, while preferential margins raise it. In addition, we reveal that the effects of ROOs differ by type of ROO. In particular, negative effects are notably larger for "change-in-tariff classification (CTC) and value-added (VA) rules", which require satisfying both CTC and VA rules, compared with the simple "CTC rule" or the selective "CTC or VA rule." Also, among CTC rules, the magnitude of negative effects tends to be larger for "change-in-chapter (CC) rule" than "change-in-heading (CH) rule". Our results suggest that restrictive ROOs impede trade, and thus it is important to apply user-friendly ROOs with less restrictiveness to promote FTA utilization.