The Laffer Curve for Rules of Origin

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: Firms in regional trade areas choose whether to comply with rules of origin (RoO) or pay a tariff penalty. Stricter content requirements initially expand regional part sourcing, but contract it when set at levels above a threshold, analogously to the Laffer curve for taxes. We calibrate the model to fit part cost shares for autos sold in North America. The effects of the 75% RoO imposed in 2020 depend on the relevant tariff and the ability to relocate assembly. With fixed assembly locations, the higher RoO reduces employment in all three countries for cars, where tariffs are low. For trucks, the 25% US tariff induces more compliance in Canada and Mexico, increasing employment in those countries. With the option to relocate assembly, higher RoOs redistribute employment to the US, but Canada and Mexico lose more, leading to a half percent decline in North American employment for both cars and trucks.

Date: 2024-07
Note: View the original document on HAL open archive server: https://sciencespo.hal.science/hal-04606111v1
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Published in Journal of International Economics, 2024, 150, pp.103911. ⟨10.1016/j.jinteco.2024.103911⟩

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Journal Article: The Laffer curve for rules of origin (2024)
Working Paper: The Laffer Curve for Rules of Origin (2024)
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Persistent link: https://EconPapers.repec.org/RePEc:hal:journl:hal-04606111

DOI: 10.1016/j.jinteco.2024.103911

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