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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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Identification Number: 10.1016/j.jinteco.2023.103874


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:
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: 15 May 2024 17:51

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