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Free Trade Areas and Rules of Origin

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Author Info

  • Arvind Panagariya
  • Rupa Duttagupta

Abstract

Incorporating intermediate inputs into a small-union general-equilibrium model, this paper first develops the welfare economics of preferential trading under the rules of origin (ROO) and then demonstrates that the ROO could improve the political viability of Free Trade Agreements (FTAs). Two interesting outcomes are derived. First, a welfare reducing FTA that was rejected in the absence of the ROO becomes feasible in the presence of these rules. Second, a welfare improving FTA that was rejected in the absence of the ROO is endorsed in their presence, but upon endorsement it becomes welfare inferior relative to the status quo.

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Bibliographic Info

Paper provided by International Monetary Fund in its series IMF Working Papers with number 03/229.

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Length: 30
Date of creation: 01 Nov 2003
Date of revision:
Handle: RePEc:imf:imfwpa:03/229

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Related research

Keywords: Welfare; Economic models; tariff revenue; free trade; rules of origin; trade creating; trade diversion; intermediate inputs; political economy; mfn tariffs; trade agreements; world price; tariff rates; free trade agreements; external tariffs; trade areas; partner country; free trade areas; preferential trade; regional integration; import demand; export supply; pattern of trade; domestic price; trading blocs; preferential trading; preferential trade agreements; trade agreement; tariff rate; free trade agreement; equilibrium model; external tariff; multilateralism; importing country; tariff classification; international trade; export subsidies; trade theory; intermediate goods; lost tariff revenue; imported intermediate; round agreement; multilateral trade negotiations; domestic demand; loss of tariff revenue; trade deflection; tariff structures; trade reform; import subsidy; world prices; multilateral trade; protectionist bias; trade area; imperfect competition; preferential trade areas; tariff heading; open regionalism; trade liberalization; tariff reform; free trade area; exportable goods; perfect substitutes; world market; preferential trade liberalization; trade negotiations; export price; preferential trading arrangements; factor endowments; duty-free access; trading system; tariff protection; domestic production; tariff-inclusive price; world economy; member country; trading arrangements; commercial policy; protectionist devices; trade creation; import duty;

References

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  1. Grossman, Gene M & Helpman, Elhanan, 1994. "Protection for Sale," American Economic Review, American Economic Association, vol. 84(4), pages 833-50, September.
  2. Andriamananjara, Soamiely, 1999. "On the size and number of regional integration arrangements - a political economy model," Policy Research Working Paper Series 2117, The World Bank.
  3. Arvind Panagariya, 1999. "The Regionalism Debate: An Overview," The World Economy, Wiley Blackwell, vol. 22(4), pages 477-512, 06.
  4. Pravin Krishna, 1998. "Regionalism And Multilateralism: A Political Economy Approach," The Quarterly Journal of Economics, MIT Press, vol. 113(1), pages 227-250, February.
  5. Krueger, Anne O., 1997. "Free trade agreements versus customs unions," Journal of Development Economics, Elsevier, vol. 54(1), pages 169-187, October.
  6. Kyle Bagwell & Robert W. Staiger, 1993. "Miltilateral Tariff Cooperation During the Formation of Customs Unions," Discussion Papers 1070, Northwestern University, Center for Mathematical Studies in Economics and Management Science.
  7. Bond, Eric W. & Syropoulos, Constantinos, 1996. "The size of trading blocs Market power and world welfare effects," Journal of International Economics, Elsevier, vol. 40(3-4), pages 411-437, May.
  8. Grossman, Gene & Helpman, Elhanan, 1994. "The Politics of Free Trade Agreements," CEPR Discussion Papers 908, C.E.P.R. Discussion Papers.
  9. Baldwin, Richard, 1993. "A Domino Theory of Regionalism," CEPR Discussion Papers 857, C.E.P.R. Discussion Papers.
  10. Bagwell, Kyle & Staiger, Robert W, 1997. "Multilateral Tariff Cooperation during the Formation of Free Trade Areas," International Economic Review, Department of Economics, University of Pennsylvania and Osaka University Institute of Social and Economic Research Association, vol. 38(2), pages 291-319, May.
  11. Jiandong Ju & Kala Krishna, 2005. "Firm behaviour and market access in a Free Trade Area with rules of origin," Canadian Journal of Economics, Canadian Economics Association, vol. 38(1), pages 290-308, February.
  12. Sang-Seung, Yi, 1996. "Endogenous formation of customs unions under imperfect competition: open regionalism is good," Journal of International Economics, Elsevier, vol. 41(1-2), pages 153-177, August.
  13. Bhagwati, Jagdish & Panagariya, Arvind, 1996. "The Theory of Preferential Trade Agreements: Historical Evolution and Current Trends," American Economic Review, American Economic Association, vol. 86(2), pages 82-87, May.
  14. Rod Falvey & Geoff Reed,, . "Economic Effects of Rules of Origin," Discussion Papers 97/21, University of Nottingham, CREDIT.
  15. Bernheim, B Douglas & Whinston, Michael D, 1986. "Menu Auctions, Resource Allocation, and Economic Influence," The Quarterly Journal of Economics, MIT Press, vol. 101(1), pages 1-31, February.
  16. 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.
  17. Wilfred J. Ethier, 1998. "Regionalism in a Multilateral World," Journal of Political Economy, University of Chicago Press, vol. 106(6), pages 1214-1245, December.
  18. Panagariya, Arvind & Findlay, Ronald & DEC, 1994. "A political - economy analysis of free trade areas and customs unions," Policy Research Working Paper Series 1261, The World Bank.
  19. Kala Krishna & Anne Krueger, 1995. "Implementing Free Trade Areas: Rules of Origin and Hidden Protection," NBER Working Papers 4983, National Bureau of Economic Research, Inc.
  20. Arvind Panagariya, 2000. "Preferential Trade Liberalization: The Traditional Theory and New Developments," Journal of Economic Literature, American Economic Association, vol. 38(2), pages 287-331, June.
  21. Arvind Panagariya, 2003. "Preferential Trading and Welfare: The Small-Union Case Revisited," International Trade 0308009, EconWPA.
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Citations

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Cited by:
  1. Uttam Kumar Deb, 2006. "Rules of Origin and Non-Tariff Barriers in Agricultural Trade: Perspectives from Bangladesh and Cambodia," Working Papers 1206, Asia-Pacific Research and Training Network on Trade (ARTNeT), an initiative of UNESCAP and IDRC, Canada..
  2. Cadot, Olivier & Estevadeordal, Antoni & Suwa Eisenmann, Akiko, 2005. "Rules of Origin as Export Subsidies," CEPR Discussion Papers 4999, C.E.P.R. Discussion Papers.
  3. Ram Upendra Das, 2010. "Rules of Origin under Regional Trade Agreements," Trade Working Papers 22791, East Asian Bureau of Economic Research.
  4. Patricia Augier & Michael Gasiorek & Charles Lai-Tong, 2007. "Multilateralising Regionalism: Relaxing the Rules of Origin Or Can Those Pecs Be Flexed?," CARIS Working Papers 03, Centre for the Analysis of Regional Integration at Sussex, University of Sussex.
  5. Arvind Panagariya, 2003. "South Asia: Does Preferential Trade Liberalisation Make Sense?," The World Economy, Wiley Blackwell, vol. 26(9), pages 1279-1291, 09.
  6. Patricia Augier & Michael Gasiorek & Charles Lai Tong, 2005. "The impact of rules of origin on trade flows," Economic Policy, CEPR & CES & MSH, vol. 20(43), pages 567-624, 07.
  7. Joseph Francois, 2005. "Preferential Trade Arrangements and the Pattern of Production and Trade when Inputs are Differentiated," Tinbergen Institute Discussion Papers 05-072/2, Tinbergen Institute.
  8. Kala Krishna, 2005. "Understanding Rules of Origin," NBER Working Papers 11150, National Bureau of Economic Research, Inc.

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