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Rules of Origin and Consumer-Hurting Free Trade Agreements

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  • Mukunoki, Hiroshi
  • Okoshi, Hirofumi

Abstract

This study examines how the rules of origin (RoO) of a free trade agreement (FTA) affect firms' pricing strategies. The value‐added criterion (VAC) of the RoO requires firms to add more than a certain level of value within an FTA when firms use inputs originating from outside the FTA. The VAC may work as a price floor, and the resulting increases in prices can benefit all firms if it induces an offshoring firm to manipulate its output price. Meanwhile, a consumer‐hurting FTA formation is possible, even if all firms make tariff‐free exports. Furthermore, such an FTA formation may worsen total welfare.
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Suggested Citation

  • Mukunoki, Hiroshi & Okoshi, Hirofumi, 2019. "Rules of Origin and Consumer-Hurting Free Trade Agreements," Discussion Papers in Economics 61759, University of Munich, Department of Economics.
    • Handle: RePEc:lmu:muenec:61759
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    1. Hiroshi Mukunoki & Hirofumi Okoshi, 2021. "Tariff elimination versus tax avoidance: free trade agreements and transfer pricing," International Tax and Public Finance, Springer;International Institute of Public Finance, vol. 28(5), pages 1188-1210, October.
    2. MUKUNOKI Hiroshi & OKOSHI Hirofumi, 2021. "Wake Not a Sleeping Lion: Free Trade Agreements and Decision Rights in Multinationals," Discussion papers 21036, Research Institute of Economy, Trade and Industry (RIETI).

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    More about this item

    JEL classification:

    • F13 - International Economics - - Trade - - - Trade Policy; International Trade Organizations
    • F15 - International Economics - - Trade - - - Economic Integration
    • L11 - Industrial Organization - - Market Structure, Firm Strategy, and Market Performance - - - Production, Pricing, and Market Structure; Size Distribution of Firms

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