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Optimal Rules of Origin with Asymmetric Compliance Costs under International Duopoly

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  • Naoto Jinji
  • Yoshihiro Mizoguchi

Abstract

We examine the optimal rules of origin (ROO) in a free trade area/agreement (FTA) by employing a stylized three-country partial equilibrium model of an international duopoly. We incorporate compliance costs of the ROO into the model. In particular, compliance costs are higher for a firm located in a non-member country of the FTA than for a firm (an internal firm) located in an FTA member country, whereas marginal production costs are lower for the former. The FTA member countries set the optimal level of ROO to maximize their joint welfare. An importing country within the FTA imposes tariffs on imports that do not comply with the ROO. We show that the optimal ROO may have a protectionist bias in the sense that they are set for only the internal firm to comply. ROO may also cause low utilization of FTAs when they are set such that even the internal firm does not comply with them. These cases arise depending on parameter values. Copyright Springer Science+Business Media New York 2016

Suggested Citation

  • Naoto Jinji & Yoshihiro Mizoguchi, 2016. "Optimal Rules of Origin with Asymmetric Compliance Costs under International Duopoly," Journal of Industry, Competition and Trade, Springer, vol. 16(1), pages 1-24, March.
    • Handle: RePEc:kap:jincot:v:16:y:2016:i:1:p:1-24
    DOI: 10.1007/s10842-015-0202-z
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    Cited by:

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    More about this item

    Keywords

    Free trade area/agreement; Rules of origin; Compliance costs; Oligopoly; Double rent-shifting; F12; F15;
    All these keywords.

    JEL classification:

    • F12 - International Economics - - Trade - - - Models of Trade with Imperfect Competition and Scale Economies; Fragmentation
    • F15 - International Economics - - Trade - - - Economic Integration

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