Anti-Competitive and Rent-Shifting Aspects of Domestic-Content Provisions in Regional Trade Blocks

Florencio Lopez- de-Silane, James Markusen and Thomas Rutherford ()
Authors registered in the RePEc Author Service: Florencio Lopez-de-Silanes ()

No 4512, NBER Working Papers from National Bureau of Economic Research, Inc

Abstract: Regional trade agreements must specify domestic-content rules (rules of origin) that define the conditions under which a good qualifies as 'domestic' and so may be freely traded within the block. The paper analyzes such rules, focussing in particular on oligopolistic industries in which foreign multinationals producing within the block rely much more on imported intermediate inputs than do domestic firms. In such a situation, we argue that domestic content provisions are anti-competitive, reducing overall final output of the industry, and shift rents (in the absence of free entry) to domestic firms. It is possible that the anti-competitive aspect of the rules are sufficiently strong that total industry profits rise and the equilibrium demand for the substitute domestic inputs falls (the scale effect of reduced output outweighs a substitution effect in favor of domestic intermediates). The latter effect is more likely to the extent that the foreign multinationals can switch from producing within the block to exporting to the block. These ideas are then examined numerically using an applied general-equilibrium model of the North American auto industry.

JEL-codes: F12 F13 (search for similar items in EconPapers)
Date: 1993-10
Note: ITI
References: View references in EconPapers View complete reference list from CitEc
Citations: View citations in EconPapers (5)

Published as "Trade Policy Subleties with Multinational Firms" European Economic Review,vol. 40, 1996, pp. 1605-1627.

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