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Rules of origin and international R&D rivalry

Author

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  • Kazuhiro Takauchi

    () (Department of Economics, Management and Information Science, Onomichi University)

Abstract

We study a three-country three-firm free trade area (FTA) trade model with rules of origin (ROO) under international R&D competition. The external tariff is chosen by the country importing final goods in the FTA. If the FTA chooses a higher content rate of ROO, the country importing final goods chooses a higher tariff in order to compensate for lower consumer surplus. We have three results. First, if the FTA raises the content rate, it raises the costs of exporters within the area, but if the R&D cost is sufficiently low, the exporters actually increase exports and their profits also increase. Second, if the firms within the FTA are less efficient than outsiders, the social welfare of countries importing final goods is affected by the content rate in a U-shaped fashion. A tightening of ROO may reduce the social welfare of importing countries since it may replace productive firms outside the FTA with less productive local firms. Third, if the productivity within an FTA is relatively high, the optimal content rate of ROO for the importing country within the FTA is 100%. In that case, the country importing final goods does not need to rely on imports from outside. Since an increase in the content rate of ROO increases external tariff, the most stringent ROO requirement is desirable for that country.

Suggested Citation

  • Kazuhiro Takauchi, 2011. "Rules of origin and international R&D rivalry," Economics Bulletin, AccessEcon, vol. 31(3), pages 2319-2332.
    • Handle: RePEc:ebl:ecbull:eb-10-00145
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    File URL: http://www.accessecon.com/Pubs/EB/2011/Volume31/EB-11-V31-I3-P209.pdf
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    References listed on IDEAS

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    1. Leahy, Dermot & Neary, J Peter, 1996. "International R&D Rivalry and Industrial Strategy without Government Commitment," Review of International Economics, Wiley Blackwell, vol. 4(3), pages 322-338, October.
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    Citations

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    Cited by:

    1. Naoto Jinji & Yoshihiro Mizoguchi, 2016. "Optimal Rules of Origin with Asymmetric Compliance Costs under International Duopoly," Journal of Industry, Competition and Trade, Springer, vol. 16(1), pages 1-24, March.
    2. Sung Hee Lee & Kun Soo Park & Yong Won Seo, 2016. "Multinational Firm’s Production Decisions under Overlapping Free Trade Agreements: Rule of Origin Requirements and Environmental Regulation," Sustainability, MDPI, Open Access Journal, vol. 9(1), pages 1-16, December.
    3. Takauchi, Kazuhiro, 2015. "Endogenous transport price and international R&D rivalry," Economic Modelling, Elsevier, vol. 46(C), pages 36-43.
    4. Jinji, Naoto & Mizoguchi, Yoshihiro, 2016. "Rules of origin and technology spillovers from foreign direct investment under international duopoly," Japan and the World Economy, Elsevier, vol. 40(C), pages 47-60.

    More about this item

    Keywords

    Rules of origin (ROO); Free trade area (FTA); Research and Development (R&D) rivalry;

    JEL classification:

    • F1 - International Economics - - Trade

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