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Anti-Competitive and Rent-Shifting Aspects of Domestic-Content Provisions in Regional Trade Blocks

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  • Florencio Lopez-de-Silane
  • James R. Markusen
  • Thomas F. Rutherford

Abstract

Regional trade agreements must specify domestic-content rules (rules of origin) that define the conditions under which a good qualifies as 'domestic' and so may be freely traded within the block. The paper analyzes such rules, focussing in particular on oligopolistic industries in which foreign multinationals producing within the block rely much more on imported intermediate inputs than do domestic firms. In such a situation, we argue that domestic content provisions are anti-competitive, reducing overall final output of the industry, and shift rents (in the absence of free entry) to domestic firms. It is possible that the anti-competitive aspect of the rules are sufficiently strong that total industry profits rise and the equilibrium demand for the substitute domestic inputs falls (the scale effect of reduced output outweighs a substitution effect in favor of domestic intermediates). The latter effect is more likely to the extent that the foreign multinationals can switch from producing within the block to exporting to the block. These ideas are then examined numerically using an applied general-equilibrium model of the North American auto industry.

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Bibliographic Info

Paper provided by National Bureau of Economic Research, Inc in its series NBER Working Papers with number 4512.

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Date of creation: Oct 1993
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Publication status: published as "Trade Policy Subleties with Multinational Firms" European Economic Review,vol. 40, 1996, pp. 1605-1627.
Handle: RePEc:nbr:nberwo:4512

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  1. Kala Krishna, 1985. "Trade Restrictions as Facilitating Practices," NBER Working Papers 1546, National Bureau of Economic Research, Inc.
  2. Lopez-de-Silanes, Florencio & Markusen, James R. & Rutherford, Thomas F., 1994. "Complementarity and increasing returns in intermediate inputs," Journal of Development Economics, Elsevier, vol. 45(1), pages 101-119, October.
  3. Steven Berry & Vittorio Grilli & F. Lopez-de-Silanes, 1992. "The Automobile Industry and The Mexico-Us Free Trade Agreement," NBER Working Papers 4152, National Bureau of Economic Research, Inc.
  4. Markusen, James R. & Rutherford, Thomas F. & Hunter, Linda, 1995. "Trade liberalization in a multinational-dominated industry," Journal of International Economics, Elsevier, vol. 38(1-2), pages 95-117, February.
  5. Richard Harris, 1985. "Why Voluntary Export Restraints Are 'Voluntary.'," Canadian Journal of Economics, Canadian Economics Association, vol. 18(4), pages 799-809, November.
  6. Jonathan Eaton & Gene M. Grossman, 1983. "Optimal Trade and Industrial Policy Under Oligopoly," NBER Working Papers 1236, National Bureau of Economic Research, Inc.
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Cited by:
  1. Deborah L. Swenson, 1996. "Explaining Domestic Content: Evidence from Japanese and U.S. Auto Production in the U.S," NBER Working Papers 5495, National Bureau of Economic Research, Inc.
  2. 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.
  3. Lionel Fontagné, 1995. "Why NAFTA Might Be Discriminatory," Working Papers 1995-12, CEPII research center.

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