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The costs and benefits of rules of origin in modern free trade agreements

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  • Ornelas, Emanuel
  • Turner, John L.

Abstract

Rules of origin offer preferred market access for final goods whose inputs originate mostly within a free trade agreement. Governments often champion such rules for boosting investment. We use a property-rights framework to study when this motivation is justifiable. The rule does not bind for all supply chains, as some (very-high-productivity) suppliers comply in an unconstrained way and some (very-low-productivity) suppliers do not comply. For those suppliers it affects, the rule both increases investments and induces excessive sourcing within the trading bloc. From a social standpoint, the best rule binds for relatively high-productivity suppliers, because the marginal net welfare gain from tightening it increases with productivity. Therefore, when industry productivity is high, a strict rule is socially desirable. In contrast, a lenient rule binds for relatively low-productivity suppliers and is more likely to be harmful. For output tariffs that are not too high, a sufficiently strict rule ensures welfare gains.

Suggested Citation

  • Ornelas, Emanuel & Turner, John L., 2024. "The costs and benefits of rules of origin in modern free trade agreements," Journal of International Economics, Elsevier, vol. 147(C).
  • Handle: RePEc:eee:inecon:v:147:y:2024:i:c:s0022199623001605
    DOI: 10.1016/j.jinteco.2023.103874
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    References listed on IDEAS

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    Cited by:

    1. Pamela Bombarda & Elisa Gamberoni & Irene Iodice, 2023. "Rules of Origins Relaxation and Regional Supply Chains: Evidence from Europ," THEMA Working Papers 2023-13, THEMA (THéorie Economique, Modélisation et Applications), Université de Cergy-Pontoise.

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    More about this item

    Keywords

    Hold-up problem; Sourcing; Incomplete contracts; Regionalism;
    All these keywords.

    JEL classification:

    • F13 - International Economics - - Trade - - - Trade Policy; International Trade Organizations
    • F15 - International Economics - - Trade - - - Economic Integration
    • L22 - Industrial Organization - - Firm Objectives, Organization, and Behavior - - - Firm Organization and Market Structure
    • D23 - Microeconomics - - Production and Organizations - - - Organizational Behavior; Transaction Costs; Property Rights

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