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Firm Behavior and Market Access in a Free Trade Area with Rules of Origin

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  • Jiandong Ju
  • Kala Krishna

Abstract

We develop a model to study the behavior of firms in a Free Trade Area with Rules of Origin and the consequences of this behavior on the market equilibrium and outcome. We show that firms will choose to specialize, and that an FTA with strict ROOs on the intermediate good raises imports and hence improves market access in the final good market reduces imports and hence harms market access in the intermediate good market. More restrictive ROOs on the final good first raise and then lower imports of the final good lower than raise imports of the intermediate good. Their turning point is common so that imports of the final good are maximized and imports of the intermediate good are minimized at a common level of restrictiveness of the rules of origin. We show that our model can be reinterpreted to show that more restrictive ROOs on the final good first improves and then harms the fortunes of labor, and to cast light on a particular policy to improve market access. Other problems with a similar structure could also be analyzed using our techniques; we expect similar results.

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Bibliographic Info

Paper provided by National Bureau of Economic Research, Inc in its series NBER Working Papers with number 6857.

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Date of creation: Dec 1998
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Publication status: published as 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.
Handle: RePEc:nbr:nberwo:6857

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  1. Pravin Krishna, . "Regionalism and Multilaterialism: A Political Economy Approach," Working Papers 96-5, Brown University, Department of Economics.
  2. Lopez, Ramon E. & Rodrik, Dani, 1990. "Trade restrictions with imported intermediate inputs : When does the trade balance improve?," Journal of Development Economics, Elsevier, vol. 34(1-2), pages 329-338, November.
  3. Lopez, Ramon & Panagariya, Arvind, 1992. "On the Theory of Piecemeal Tariff Reform: The Case of Pure Imported Intermediate Inputs," American Economic Review, American Economic Association, vol. 82(3), pages 615-25, June.
  4. Krueger, Anne O., 1997. "Free trade agreements versus customs unions," Journal of Development Economics, Elsevier, vol. 54(1), pages 169-187, October.
  5. Richardson, Martin, 1995. "Tariff revenue competition in a free trade area," European Economic Review, Elsevier, vol. 39(7), pages 1429-1437, August.
  6. Ju, J. & Krishna, K., 1995. "Market Access and Welfare Effects of Free Trade Areas Without Rules of Origin," Papers 11-95-3a, Pennsylvania State - Department of Economics.
  7. Carsten Kowalczyk, 1990. "Welfare and Customs Unions," NBER Working Papers 3476, National Bureau of Economic Research, Inc.
  8. Paul Krugman, 1989. "Is Bilateralism Bad?," NBER Working Papers 2972, National Bureau of Economic Research, Inc.
  9. Anderson, James E & Neary, J Peter, 1994. "Measuring the Restrictiveness of Trade Policy," World Bank Economic Review, World Bank Group, vol. 8(2), pages 151-69, May.
  10. repec:fth:coluec:9596-04 is not listed on IDEAS
  11. Levy, Philip I, 1997. "A Political-Economic Analysis of Free-Trade Agreements," American Economic Review, American Economic Association, vol. 87(4), pages 506-19, September.
  12. 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.
  13. Bagwell,K. & Staiger,R.W., 1998. "The simple economics of labor standards and the Gatt," Working papers 9, Wisconsin Madison - Social Systems.
  14. 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.
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