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Rules of Origin and Strategic Choice of Compliance

  • Kazuhiro Takauchi

    ()

This paper examines how an input supplier’s monopoly power affects exporters’ choice between compliance and noncompliance with rules of origin (ROO) in a free trade area (FTA). When the regional input supplier has monopoly power, the number of compliers largely affects the input price. This is because to meet ROO, exporters must use a certain ratio of the input originated within the area. In such a case, each exporter has an incentive to choose noncompliance with ROO if the rival exporter complies. Because this incentive yields strategic substitution between symmetric exporters, the coexistence of the complier and the non-complier appears in equilibrium. Our model consists of three final-good producers (one in an importing country and two in an exporting country) and one input supplier, which is in the importing country and has monopoly power. We show that within the range of parameter values for which some exporters comply with ROO, the content rate affects the output of the final-good producer in the importing country and the country’s welfare in a U-shaped fashion. The content rate levels that allow the coexistence of the complier and the non-complier minimize welfare. Copyright Springer Science+Business Media New York 2014

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File URL: http://hdl.handle.net/10.1007/s10842-013-0159-8
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Article provided by Springer in its journal Journal of Industry, Competition and Trade.

Volume (Year): 14 (2014)
Issue (Month): 2 (June)
Pages: 287-302

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Handle: RePEc:kap:jincot:v:14:y:2014:i:2:p:287-302
Contact details of provider: Web page: http://springerlink.metapress.com/link.asp?id=105724

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  1. Mark J. Melitz, 2002. "The Impact of Trade on Intra-Industry Reallocations and Aggregate Industry Productivity," NBER Working Papers 8881, National Bureau of Economic Research, Inc.
  2. Kazunobu Hayakawa & Daisuke Hiratsuka & Kohei Shiino & Seiya Sukegawa, 2013. "Who Uses Free Trade Agreements?," Asian Economic Journal, East Asian Economic Association, vol. 27(3), pages 245-264, 09.
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  7. Demidova, Svetlana & Krishna, Kala, 2008. "Firm heterogeneity and firm behavior with conditional policies," Economics Letters, Elsevier, vol. 98(2), pages 122-128, February.
  8. Lopez-de-Silanes, Florencio & Markusen, James R. & Rutherford, Thomas F., 1996. "Trade policy subtleties with multinational firms," European Economic Review, Elsevier, vol. 40(8), pages 1605-1627, November.
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  11. repec:inr:wpaper:156782 is not listed on IDEAS
  12. Mizuno, Tomomichi & Takauchi, Kazuhiro, 2013. "Rules of origin and uncertain cost of compliance," MPRA Paper 44431, University Library of Munich, Germany.
  13. Lahiri, S. & Ono, Y., 1998. "Export-Oriented Foreign Direct Investment and Local Content Requirement," ISER Discussion Paper 0456, Institute of Social and Economic Research, Osaka University.
  14. Rod Falvey & Geoff Reed,, . "Economic Effects of Rules of Origin," Discussion Papers 97/21, University of Nottingham, CREDIT.
  15. Lahiri, S & Ono, Y, 1997. "Foreign Direct Investment, Local Content Requirement, and Profit Taxation," ISER Discussion Paper 0438, Institute of Social and Economic Research, Osaka University.
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