Rules of Origin and Strategic Choice of Compliance
We consider exporters' strategic choice of whether to comply with rules of origin (ROO) in a free trade area (FTA). While the existing literature of ROO considers models of perfect or monopolistic competition, we consider an oligopolistic trade model. Our model consists of three final-good producers - one in an importing country and two in an exporting country - and one intermediategood producer, 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 social welfare in an U-shaped fashion. The content rate levels that allow the coexistence of compliers and non-compliers minimize social welfare.
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- 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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