The costs and benefits of rules of origin in modern free trade agreements

Emanuel Ornelas and John L. Turner

LSE Research Online Documents on Economics from London School of Economics and Political Science, LSE Library

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; Incomplete contracts; Regionalism; Sourcing (search for similar items in EconPapers)
JEL-codes: D23 F13 F15 L22 (search for similar items in EconPapers)
Pages: 25 pages
Date: 2024-01-01
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Published in Journal of International Economics, 1, January, 2024, 147. ISSN: 0022-1996

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http://eprints.lse.ac.uk/121408/ Open access version. (application/pdf)

Related works:
Journal Article: The costs and benefits of rules of origin in modern free trade agreements (2024)
Working Paper: The costs and benefits of rules of origin in modern free trade agreements (2022)
Working Paper: The Costs and Benefits of Rules of Origin in Modern Free Trade Agreements (2022)
Working Paper: The costs and benefits of rules of origin in modern free trade agreements (2022)
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