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

Ornelas, Emanuel ORCID: 0000-0001-8330-8745 and Turner, John L. (2024) The costs and benefits of rules of origin in modern free trade agreements. Journal of International Economics, 147. ISSN 0022-1996

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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.

Item Type:	Article
Official URL:	https://www.sciencedirect.com/journal/journal-of-i...
Additional Information:	© 2023 Elsevier B.V.
Divisions:	Centre for Economic Performance
Subjects:	H Social Sciences > HB Economic Theory
JEL classification:	F - International Economics > F1 - Trade > F13 - Commercial Policy; Protection; Promotion; Trade Negotiations; International Trade Organizations F - International Economics > F1 - Trade > F15 - Economic Integration L - Industrial Organization > L2 - Firm Objectives, Organization, and Behavior > L22 - Firm Organization and Market Structure: Markets vs. Hierarchies; Vertical Integration; Conglomerates; Subsidiaries D - Microeconomics > D2 - Production and Organizations > D23 - Organizational Behavior; Transaction Costs; Property Rights
Date Deposited:	18 Jan 2024 13:06
Last Modified:	12 Dec 2024 04:01
URI:	http://eprints.lse.ac.uk/id/eprint/121408

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