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Rules of origin and international R&D rivalry

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  • Kazuhiro Takauchi

    ()
    (Department of Economics, Management and Information Science, Onomichi University)

Abstract

We study a three-country three-firm free trade area (FTA) trade model with rules of origin (ROO) under international R&D competition. The external tariff is chosen by the country importing final goods in the FTA. If the FTA chooses a higher content rate of ROO, the country importing final goods chooses a higher tariff in order to compensate for lower consumer surplus. We have three results. First, if the FTA raises the content rate, it raises the costs of exporters within the area, but if the R&D cost is sufficiently low, the exporters actually increase exports and their profits also increase. Second, if the firms within the FTA are less efficient than outsiders, the social welfare of countries importing final goods is affected by the content rate in a U-shaped fashion. A tightening of ROO may reduce the social welfare of importing countries since it may replace productive firms outside the FTA with less productive local firms. Third, if the productivity within an FTA is relatively high, the optimal content rate of ROO for the importing country within the FTA is 100%. In that case, the country importing final goods does not need to rely on imports from outside. Since an increase in the content rate of ROO increases external tariff, the most stringent ROO requirement is desirable for that country.

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File URL: http://www.accessecon.com/Pubs/EB/2011/Volume31/EB-11-V31-I3-P209.pdf
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Bibliographic Info

Article provided by AccessEcon in its journal Economics Bulletin.

Volume (Year): 31 (2011)
Issue (Month): 3 ()
Pages: 2319-2332

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Handle: RePEc:ebl:ecbull:eb-10-00145

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Related research

Keywords: Rules of origin (ROO); Free trade area (FTA); Research and Development (R&D) rivalry;

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  1. Lahiri, S. & Ono, Y., 1998. "Export-Oriented Foreign Direct Investment and Local Content Requirement," ISER Discussion Paper 0456, Institute of Social and Economic Research, Osaka University.
  2. Nilssen, Tore & Pita Barros, Pedro Luis, 1998. "Industrial Policy and Firm Heterogeneity," CEPR Discussion Papers 1986, C.E.P.R. Discussion Papers.
  3. Rod Falvey & Geoff Reed, 2002. "Rules of Origin as Commercial Policy Instruments," International Economic Review, Department of Economics, University of Pennsylvania and Osaka University Institute of Social and Economic Research Association, vol. 43(2), pages 393-408, May.
  4. D. Leahy & J. P. Neary, 1997. "R&D spillovers and the case for industrial policy in an open economy," LSE Research Online Documents on Economics 20342, London School of Economics and Political Science, LSE Library.
  5. Leahy, Dermot & Neary, J Peter, 1995. "International R&D Rivalry and Industrial Strategy without Government Commitment," CEPR Discussion Papers 1199, C.E.P.R. Discussion Papers.
  6. Lahiri, Sajal & Ono, Yoshiyasu, 1988. "Helping Minor Firms Reduces Welfare," Economic Journal, Royal Economic Society, vol. 98(393), pages 1199-1202, December.
  7. Junichiro Ishida & Toshihiro Matsumura & Noriaki Matsushima, 2011. "Market Competition, R&D And Firm Profits In Asymmetric Oligopoly," Journal of Industrial Economics, Wiley Blackwell, vol. 59(3), pages 484-505, 09.
  8. Lahiri, Sajal & Ono, Yoshiyasu, 1998. "Foreign Direct Investment, Local Content Requirement, and Profit Taxation," Economic Journal, Royal Economic Society, vol. 108(447), pages 444-57, March.
  9. Lopez-de-Silanes, Florencio & Markusen, James R. & Rutherford, Thomas F., 1996. "Trade policy subtleties with multinational firms," European Economic Review, Elsevier, vol. 40(8), pages 1605-1627, November.
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