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On the Welfare Effect of FTAs in the Presence of FDIs and Rules of Origin

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  • MUKONOKI Hiroshi

Abstract

This paper investigates the welfare effect of forming free trade agreements (FTAs) in an international oligopoly model with cost heterogeneity. To receive tariff-free treatment, firms must comply with the rules of origin (ROO) that require them to use a certain fraction of the parts and intermediates produced within the FTA. Firms producing outside of the FTA could undertake either market-oriented or export-platform foreign direct investment (FDIs). The presence of ROO has the following potential effects: (i) making an initially infeasible FTA become feasible by deterring outside firms from undertaking FDI, (ii) inducing an export-platform FDI of a less efficient firm to replace a market-oriented FDI of an efficient firm, or (iii) discharging FDIs made before the FTA was formed and deterring all possible FDIs. These potential effects complicate the welfare effect of FTAs and could decrease consumer surplus in member countries.

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Bibliographic Info

Paper provided by Research Institute of Economy, Trade and Industry (RIETI) in its series Discussion papers with number 13053.

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Length: 38 pages
Date of creation: Jun 2013
Date of revision:
Handle: RePEc:eti:dpaper:13053

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  1. Jiandong Ju & Kala Krishna, 1998. "Firm Behavior and Market Access in a Free Trade Area with Rules of Origin," NBER Working Papers 6857, National Bureau of Economic Research, Inc.
  2. Richardson, Martin, 1995. "Tariff revenue competition in a free trade area," European Economic Review, Elsevier, vol. 39(7), pages 1429-1437, August.
  3. Rod Falvey & Geoff Reed, 1998. "Economic effects of rules of origin," Review of World Economics (Weltwirtschaftliches Archiv), Springer, vol. 134(2), pages 209-229, June.
  4. Jota Ishikawa & Yoshimasa Komoriya, 2010. "Stay Or Leave? Choice Of Plant Location With Cost Heterogeneity," The Japanese Economic Review, Japanese Economic Association, vol. 61(1), pages 97-115.
  5. Juan RosellOn, 2001. "The economics of rules of origin," The Journal of International Trade & Economic Development, Taylor & Francis Journals, vol. 9(4), pages 397-425.
  6. Blanchard Emily J, 2007. "Foreign Direct Investment, Endogenous Tariffs, and Preferential Trade Agreements," The B.E. Journal of Economic Analysis & Policy, De Gruyter, vol. 7(1), pages 1-52, November.
  7. Motta, Massimo & Norman, George, 1996. "Does Economic Integration Cause Foreign Direct Investment?," International Economic Review, Department of Economics, University of Pennsylvania and Osaka University Institute of Social and Economic Research Association, vol. 37(4), pages 757-83, November.
  8. José Ernesto López Córdova & Kati Suominen & Antoni Estevadeordal, 2006. "How do Rules of Origin Affect Investment Flows?: Some Hypotheses and the Case of Mexico," IDB Publications 9343, Inter-American Development Bank.
  9. Jota Ishikawa & Hiroshi Mukunoki & Yoshihiro Mizoguchi, 2007. "Economic Integration And Rules Of Origin Under International Oligopoly," International Economic Review, Department of Economics, University of Pennsylvania and Osaka University Institute of Social and Economic Research Association, vol. 48(1), pages 185-210, 02.
  10. Horst Raff, 2002. "Preferential Trade Agreements and Tax Competition for Foreign Direct Investment," CESifo Working Paper Series 763, CESifo Group Munich.
  11. Karolina Ekholm & Rikard Forslid & James Markusen, 2003. "Export-Platform Foreign Direct Investment," NBER Working Papers 9517, National Bureau of Economic Research, Inc.
  12. Ornelas, Emanuel, 2005. "Trade creating free trade areas and the undermining of multilateralism," European Economic Review, Elsevier, vol. 49(7), pages 1717-1735, October.
  13. Yomogida, Morihiro, 2007. "Fragmentation, welfare, and imperfect competition," Journal of the Japanese and International Economies, Elsevier, vol. 21(3), pages 365-378, September.
  14. Peter L. Rodriguez, 2001. "Rules of Origin with Multistage Production," The World Economy, Wiley Blackwell, vol. 24(2), pages 201-220, 02.
  15. Qiu, Larry D. & Tao, Zhigang, 2001. "Export, foreign direct investment, and local content requirement," Journal of Development Economics, Elsevier, vol. 66(1), pages 101-125, October.
  16. Shabtai Donnenfeld, 2003. "Regional Blocs and Foreign Direct Investment," Review of International Economics, Wiley Blackwell, vol. 11(5), pages 770-788, November.
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