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Exchange rate and utilization of free trade agreements: Focus on rules of origin

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  • Hayakawa, Kazunobu
  • Kim, Han-Sung
  • Yoshimi, Taiyo

Abstract

Tariff rates under a free trade agreement (FTA) are not necessarily used in the majority of trade, even among members of an FTA. One of the causes of this phenomenon is the presence of rules of origin (RoOs), which require exporters to comply with specific conditions when utilizing an FTA scheme. To consider how RoOs should be designed so that exporters can more robustly use an FTA scheme, this paper investigates the effect of exchange rates on FTA scheme utilization with a focus on RoOs. Exchange rates affect exporters’ compliance with RoOs by changing the so-called value-added ratio, which is defined as [1–(Price of imported inputs from non-FTA member countries/Export product price)]. Based on a model of pricing-to-market, we propose that an unexpected depreciation of exporters’ currency against importers’ currency improves the value-added ratio through a rise in the export product’s price, which in turn enhances exporters’ utilization of an FTA scheme. We also show strong empirical support for the proposition using the detailed product-level data on FTA scheme utilization in Korea’s imports from Association of South East Asian Nations (ASEAN) countries.

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  • Hayakawa, Kazunobu & Kim, Han-Sung & Yoshimi, Taiyo, 2017. "Exchange rate and utilization of free trade agreements: Focus on rules of origin," Journal of International Money and Finance, Elsevier, vol. 75(C), pages 93-108.
    • Handle: RePEc:eee:jimfin:v:75:y:2017:i:c:p:93-108
    DOI: 10.1016/j.jimonfin.2017.05.002
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    Cited by:

    1. Kuo‐I Chang & Kazunobu Hayakawa & Nuttawut Laksanapanyakul & Dionisius Narjoko & Ju Hyun Pyun & Francis Quimba, 2022. "Determinants of regional trade agreement utilisation: Evidence from multiple import countries in Asia," The World Economy, Wiley Blackwell, vol. 45(6), pages 1713-1736, June.
    2. repec:era:eriabk:2021-impact-of-the-atiga-on-intra-asean-trade is not listed on IDEAS
    3. Cariola, Gianmarco & Lanz, Rainer, 2022. "Preference utilization in the global economy: An empirical analysis," WTO Staff Working Papers ERSD-2022-4, World Trade Organization (WTO), Economic Research and Statistics Division.
    4. Sasidaran Gopalan & Luu Nguyen Trieu Duong & Ramkishen S. Rajan, 2020. "Trade configurations in Asia: Assessing de facto and de jure regionalism," The World Economy, Wiley Blackwell, vol. 43(4), pages 1034-1058, April.
    5. Christopher M. Dent, 2021. "Trade, Climate and Energy: A New Study on Climate Action through Free Trade Agreements," Energies, MDPI, vol. 14(14), pages 1-30, July.

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    More about this item

    Keywords

    Free trade agreement; Exchange rates; Exchange rate pass-through; Rules of origin;
    All these keywords.

    JEL classification:

    • F1 - International Economics - - Trade
    • F3 - International Economics - - International Finance

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