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Rules of origin govern preferential trade in the North American Free Trade Agreement (NAFTA). A model of trade in intermediate goods is used to examine the effect of rules of origin on trade between member and non-member countries. High MFN tariffs and quota restrictions on textiles and apparel face East Asian producers, including those in ASEAN, in NAFTA markets but are relaxed for producers within the FTA, including Mexico. Trade diversion on a large scale is thus predicted in textiles and apparel. Evidence of such trade diversion is provided. Within NAFTA, Mexico gains market share in textiles and apparel at the expense of ASEAN and Northeast Asia. However, in Japan ASEAN gains market share. [ABSTRACT FROM AUTHOR]