The Costs and Benefits of Rules of Origin

Emanuel Ornelas and John Turner

No 18789, CEPR Discussion Papers from C.E.P.R. Discussion Papers

Abstract: Rules of origin offer preferred market access for final goods whose inputs originate mostly within a free trade agreement. Governments often champion such rules for boosting investment. We use a property-rights framework to study when this motivation is justifiable. The rule does not bind for all supply chains, as some (very-high-productivity) suppliers comply in an unconstrained way and some (very-low-productivity) suppliers do not comply. For those suppliers it affects, the rule both increases investments and induces excessive sourcing within the trading bloc. From a social standpoint, the best rule binds for relatively high-productivity suppliers, because the marginal net welfare gain from tightening it increases with productivity. Therefore, when industry productivity is high, a $strict$ rule is socially desirable. In contrast, a lenient rule binds for relatively low-productivity suppliers and is more likely to be harmful. For output tariffs that are not too high, a sufficiently strict rule ensures welfare gains.

Keywords: Hold-up problem; Sourcing; Incomplete contracts; Regionalism (search for similar items in EconPapers)
JEL-codes: D23 F13 F15 L22 (search for similar items in EconPapers)
Date: 2024-01
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