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Implementing Free Trade Areas: Rules of Origin and Hidden Protection

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  • Kala Krishna
  • Anne Krueger

Abstract

This paper focuses on the effects of rules of origin in Free Trade Areas. We first point out that even rules of origin which are not restrictive, namely those which do not raise costs of production, have very pronounced effects on trade and investment flows. We then look at some different ways of specifying rules of origin (ROOs) under perfect competition. We compare price and cost based ROOs and show that even if they are equivalent in the 'long run', they are not equivalent in the short run where capacity constraints can exist. We also show that some kinds of ROOs can be ranked in terms of their implications for producer profits. We also show that welfare is likely to be non monotonic in the restrictiveness of the ROO, so that making a ROO more stringent could raise welfare. Finally, we show that in the presence of imperfect competition, ROOs may raise output and reduce prices as they become more stringent.

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Bibliographic Info

Paper provided by National Bureau of Economic Research, Inc in its series NBER Working Papers with number 4983.

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Date of creation: Jan 1995
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Publication status: published as New Directions in Trade Theory, J. Levinsohn, A. Deardorff and R. Sterneds., (Ann Arbor: University of Michigan Press, 1995).
Handle: RePEc:nbr:nberwo:4983

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  1. McCulloch, Rachel & Johnson, Harry G, 1973. "A Note on Proportionally Distributed Quotas," American Economic Review, American Economic Association, vol. 63(4), pages 726-32, September.
  2. Michael L. Mussa, 1984. "The Economics of Content Protection," NBER Working Papers 1457, National Bureau of Economic Research, Inc.
  3. Beghin, John C. & Lovell, C. A.K., 1993. "Trade and Efficiency Effects of Domestic Content Protection: The Australian Tobacco and Cigarette Industries," Staff General Research Papers 1601, Iowa State University, Department of Economics.
  4. Florencio Lopez-de-Silane & James R. Markusen & Thomas F. Rutherford, 1993. "Anti-Competitive and Rent-Shifting Aspects of Domestic-Content Provisions in Regional Trade Blocks," NBER Working Papers 4512, National Bureau of Economic Research, Inc.
  5. Hollander, Abraham, 1987. "Content protection and transnational monopoly," Journal of International Economics, Elsevier, vol. 23(3-4), pages 283-297, November.
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