IDEAS home Printed from https://ideas.repec.org/p/pra/mprapa/44431.html
   My bibliography  Save this paper

Rules of origin and uncertain cost of compliance

Author

Listed:
  • Mizuno, Tomomichi
  • Takauchi, Kazuhiro

Abstract

To consider the role of uncertain production cost resulting from complying with rules of origin (ROO), we formulate a Cournot oligopoly model of a free trade area (FTA). If exporters do not comply with ROO, they must pay an external tariff, and if they comply, they enjoy zero tariff but suffer an uncertain production cost. Because compliers must source a certain ratio of the inputs from within the area, they face input-price fluctuations in that area; this yields an uncertain production cost for compliers. This uncertain cost provides a benefit to compliers owing to its variance. Therefore, for an intermediate external tariff, strategic substitution emerges in exporters' choice. We show that the coexistence of compliers and non-compliers is seen among symmetric exporters. We also discuss the endogenous rate of ROO-compliers in the coexisting equilibrium of compliers and non-compliers. We show that if the variance of the uncertain production cost is small, the rate of ROO-compliers in the coexisting equilibrium increases with the number of total exporters inside the FTA.

Suggested Citation

  • Mizuno, Tomomichi & Takauchi, Kazuhiro, 2013. "Rules of origin and uncertain cost of compliance," MPRA Paper 44431, University Library of Munich, Germany.
  • Handle: RePEc:pra:mprapa:44431
    as

    Download full text from publisher

    File URL: https://mpra.ub.uni-muenchen.de/44431/1/MPRA_paper_44431.pdf
    File Function: original version
    Download Restriction: no
    ---><---

    References listed on IDEAS

    as
    1. José Anson & Olivier Cadot & Antoni Estevadeordal & Jaime de Melo & Akiko Suwa‐Eisenmann & Bolormaa Tumurchudur, 2005. "Rules of Origin in North–South Preferential Trading Arrangements with an Application to NAFTA," Review of International Economics, Wiley Blackwell, vol. 13(3), pages 501-517, August.
    2. Higashida, Keisaku & Jinji, Naoto, 2006. "Strategic use of recycled content standards under international duopoly," Journal of Environmental Economics and Management, Elsevier, vol. 51(2), pages 242-257, March.
    3. Juan RosellOn, 2001. "The economics of rules of origin," The Journal of International Trade & Economic Development, Taylor & Francis Journals, vol. 9(4), pages 397-425.
    4. Rod Falvey & Geoff Reed, 1998. "Economic effects of rules of origin," Review of World Economics (Weltwirtschaftliches Archiv), Springer;Institut für Weltwirtschaft (Kiel Institute for the World Economy), vol. 134(2), pages 209-229, June.
    5. Jota Ishikawa & Hiroshi Mukunoki & Yoshihiro Mizoguchi, 2007. "Economic Integration And Rules Of Origin Under International Oligopoly," International Economic Review, Department of Economics, University of Pennsylvania and Osaka University Institute of Social and Economic Research Association, vol. 48(1), pages 185-210, February.
    6. Rod Falvey & Geoff Reed, 2002. "Rules of Origin as Commercial Policy Instruments," International Economic Review, Department of Economics, University of Pennsylvania and Osaka University Institute of Social and Economic Research Association, vol. 43(2), pages 393-408, May.
    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. Creane, Anthony & Miyagiwa, Kaz, 2009. "Forgoing invention to deter entry," International Journal of Industrial Organization, Elsevier, vol. 27(5), pages 632-638, September.
    9. Rupa Duttagupta & Arvind Panagariya, 2007. "Free Trade Areas And Rules Of Origin: Economics And Politics," Economics and Politics, Wiley Blackwell, vol. 19(2), pages 169-190, July.
    10. Creane, Anthony & Miyagiwa, Kaz, 2008. "Information and disclosure in strategic trade policy," Journal of International Economics, Elsevier, vol. 75(1), pages 229-244, May.
    11. Yang-Ming Chang & Renfeng Xiao, 2013. "Free trade areas, the limit of Rules of Origin, and optimal tariff reductions under international oligopoly: A welfare analysis," The Journal of International Trade & Economic Development, Taylor & Francis Journals, vol. 22(5), pages 694-728, August.
    12. Hayakawa, Kazunobu & Hiratsuka, Daisuke & Shiino, Kohei & Sukegawa, Seiya, 2009. "Who Uses FTAs?," IDE Discussion Papers 207, Institute of Developing Economies, Japan External Trade Organization(JETRO).
    Full references (including those not matched with items on IDEAS)

    Citations

    Citations are extracted by the CitEc Project, subscribe to its RSS feed for this item.
    as


    Cited by:

    1. Kazuhiro Takauchi, 2014. "Rules of Origin and Strategic Choice of Compliance," Journal of Industry, Competition and Trade, Springer, vol. 14(2), pages 287-302, June.

    Most related items

    These are the items that most often cite the same works as this one and are cited by the same works as this one.
    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. Kazuhiro Takauchi, 2014. "Rules of Origin and Strategic Choice of Compliance," Journal of Industry, Competition and Trade, Springer, vol. 14(2), pages 287-302, June.
    3. Chang, Yang-Ming & Xiao, Renfeng, 2015. "Preferential trade agreements between asymmetric countries: Free trade areas (with rules of origin) vs. customs unions," Japan and the World Economy, Elsevier, vol. 33(C), pages 28-43.
    4. Celik, Levent & Karabay, Bilgehan & McLaren, John, 2020. "Fast-track authority: A hold-up interpretation," Journal of International Economics, Elsevier, vol. 127(C).
    5. Rupa Duttagupta & Arvind Panagariya, 2007. "Free Trade Areas And Rules Of Origin: Economics And Politics," Economics and Politics, Wiley Blackwell, vol. 19(2), pages 169-190, July.
    6. Kala Krishna, 2005. "Understanding Rules of Origin," NBER Working Papers 11150, National Bureau of Economic Research, Inc.
    7. 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.
    8. MUKUNOKI Hiroshi & OKOSHI Hirofumi, 2019. "Tariff Elimination versus Tax Avoidance: Free Trade Agreements and Transfer Pricing," Discussion papers 19099, Research Institute of Economy, Trade and Industry (RIETI).
    9. Patricia Augier & Michael Gasiorek & Charles Lai-Tong, 2007. "Multilateralising Regionalism: Relaxing the Rules of Origin Or Can Those Pecs Be Flexed?," CARIS Working Papers 03, Centre for the Analysis of Regional Integration at Sussex, University of Sussex.
    10. MUKONOKI Hiroshi, 2013. "On the Welfare Effect of FTAs in the Presence of FDIs and Rules of Origin," Discussion papers 13053, Research Institute of Economy, Trade and Industry (RIETI).
    11. Balogun, Emmanuel Dele, 2010. "Rules of Origin in the Africa-EU Strategic Partnership Agreement and Nigeria’s international trade," MPRA Paper 23921, University Library of Munich, Germany.
    12. AUGIER Patricia & GAZIOREK Michael & LAITONG Charles, 2004. "The Impact of Rules of Origin On Trade Flows," International Trade 0404001, University Library of Munich, Germany.
    13. 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.
    14. Arvind Panagariya, 1999. "The Regionalism Debate: An Overview," The World Economy, Wiley Blackwell, vol. 22(4), pages 455-476, June.
    15. Antoine Bouët & Lionel Fontagné & Sébastien Jean, 2005. "Is Erosion of Tariff Preferences a Serious Concern?," Working Papers 2005-14, CEPII research center.
    16. Olivier Cadot & Antoni Estevadeordal & Akiko Suwa-Eisenmann, 2004. "Rules of origin as export subsidies," Research Unit Working Papers 0405, Laboratoire d'Economie Appliquee, INRA.
    17. Ulloa, Alfie & Wagner, Rodrigo, 2018. "Why don't All Exporters Benefit from Free Trade Agreements?: Estimating Utilization Costs," IDB Publications (Working Papers) 4635, Inter-American Development Bank.
    18. Kati Suominen & Antoni Estevadeordal & Jeremy Harris, 2009. "Multilateralising Preferential Rules of Origin around the World," IDB Publications (Working Papers) 9299, Inter-American Development Bank.
    19. Manchin, Miriam, 2005. "Preference utilization and tariff reduction in European Union imports from African, Caribbean, and Pacific countries," Policy Research Working Paper Series 3688, The World Bank.
    20. Jiandong Ju & Kala Krishna, 2005. "Firm behaviour and market access in a Free Trade Area with rules of origin," Canadian Journal of Economics/Revue canadienne d'économique, John Wiley & Sons, vol. 38(1), pages 290-308, February.

    More about this item

    Keywords

    Rules of origin; Compliance; Uncertain production cost; Oligopoly;
    All these keywords.

    JEL classification:

    • F12 - International Economics - - Trade - - - Models of Trade with Imperfect Competition and Scale Economies; Fragmentation
    • F13 - International Economics - - Trade - - - Trade Policy; International Trade Organizations
    • F15 - International Economics - - Trade - - - Economic Integration
    • L13 - Industrial Organization - - Market Structure, Firm Strategy, and Market Performance - - - Oligopoly and Other Imperfect Markets

    Statistics

    Access and download statistics

    Corrections

    All material on this site has been provided by the respective publishers and authors. You can help correct errors and omissions. When requesting a correction, please mention this item's handle: RePEc:pra:mprapa:44431. See general information about how to correct material in RePEc.

    For technical questions regarding this item, or to correct its authors, title, abstract, bibliographic or download information, contact: . General contact details of provider: https://edirc.repec.org/data/vfmunde.html .

    If you have authored this item and are not yet registered with RePEc, we encourage you to do it here. This allows to link your profile to this item. It also allows you to accept potential citations to this item that we are uncertain about.

    If CitEc recognized a bibliographic reference but did not link an item in RePEc to it, you can help with this form .

    If you know of missing items citing this one, you can help us creating those links by adding the relevant references in the same way as above, for each refering item. If you are a registered author of this item, you may also want to check the "citations" tab in your RePEc Author Service profile, as there may be some citations waiting for confirmation.

    For technical questions regarding this item, or to correct its authors, title, abstract, bibliographic or download information, contact: Joachim Winter (email available below). General contact details of provider: https://edirc.repec.org/data/vfmunde.html .

    Please note that corrections may take a couple of weeks to filter through the various RePEc services.

    IDEAS is a RePEc service hosted by the Research Division of the Federal Reserve Bank of St. Louis . RePEc uses bibliographic data supplied by the respective publishers.