The Unintended Consequences of High Regional Content Requirements

Keith Head, Thierry Mayer and Marc Melitz
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Marc Melitz: Department of Economics, Harvard University - Harvard University, NBER - National Bureau of Economic Research [New York] - NBER - The National Bureau of Economic Research, CEPR - Center for Economic Policy Research

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Abstract: Rules of origin (RoOs) are a common feature of regional trade agreements that fall short of full custom unions. Two of the most important trade agreements, the North American Free Trade Agreement (NAFTA) and the European Union (EU), recently enacted major changes to those rules. The 2020 USMCA agreement replacing NAFTA made those rules much stricter. Meanwhile, following its exit from the EU customs union, Britain and the remaining EU27 had to draw up new rules of origin for the EU-UK Trade and Cooperation Agreement (TCA). This chapter quantifies the main trade-offs involved in setting the strictness of RoOs in the context of the automobile industry. A more stringent agreement can raise or lower regional parts production, but it inevitably raises prices. Fitting our model to data on the use of NAFTA-origin parts in cars assembled within the region, we calibrate the key parameters that govern the responses to stricter RoOs. We then apply the calibrated model to evaluate the switch from NAFTA to the USMCA as well as other counterfactuals of interest.

Date: 2023-11-06
New Economics Papers: this item is included in nep-int and nep-ure
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Published in Lili Yan Ing; Gene Grossman. Local Content Requirements - Promises and Pitfalls, Routledge, pp.87 - 113, 2023, Routledge-ERIA Studies in Development Economics, 9781003415794. ⟨10.4324/9781003415794⟩

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Related works:
Working Paper: The Unintended Consequences of High Regional Content Requirements (2023)
Working Paper: The Unintended Consequences of High Regional Content Requirements (2023)
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Persistent link: https://EconPapers.repec.org/RePEc:hal:journl:hal-04345742

DOI: 10.4324/9781003415794

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