Rules of origin and consumer‐hurting free trade agreements

Hiroshi Mukunoki and Hirofumi Okoshi

The World Economy, 2021, vol. 44, issue 8, 2303-2318

Abstract: This study examines how the rules of origin (RoO) of a free trade agreement (FTA) affect firms' pricing strategies. The value‐added criterion (VAC) of the RoO requires firms to add more than a certain level of value within an FTA when firms use inputs originating from outside the FTA. The VAC may work as a price floor, and the resulting increases in prices can benefit all firms if it induces an offshoring firm to manipulate its output price. Meanwhile, a consumer‐hurting FTA formation is possible, even if all firms make tariff‐free exports. Furthermore, such an FTA formation may worsen total welfare.

Date: 2021
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https://doi.org/10.1111/twec.13097

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Working Paper: Rules of Origin and Consumer-Hurting Free Trade Agreements (2019)
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