Rules of origin and consumer-hurting free trade agreements*

Hiroshi Mukunoki; Hirofumi Okoshi

doi:10.1111/twec.13097

Rules of origin and consumer-hurting free trade agreements*

Hiroshi Mukunoki, Hirofumi Okoshi

Research output: Contribution to journal › Article › peer-review

1 Citation (Scopus)

Abstract

This study examines how the rules of origin (RoO) of a free trade agreement (FTA) affect firms' pricing strategies. The value-added criterion (VAC) of the RoO requires firms to add more than a certain level of value within an FTA when firms use inputs originating from outside the FTA. The VAC may work as a price floor, and the resulting increases in prices can benefit all firms if it induces an offshoring firm to manipulate its output price. Meanwhile, a consumer-hurting FTA formation is possible, even if all firms make tariff-free exports. Furthermore, such an FTA formation may worsen total welfare.

Original language	English
Pages (from-to)	2303-2318
Number of pages	16
Journal	World Economy
Volume	44
Issue number	8
DOIs	https://doi.org/10.1111/twec.13097
Publication status	Published - Aug 2021

Keywords

free trade agreements
pricing strategy
rules of origin

ASJC Scopus subject areas

Accounting
Finance
Economics and Econometrics
Political Science and International Relations

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10.1111/twec.13097

Cite this

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title = "Rules of origin and consumer-hurting free trade agreements*",

abstract = "This study examines how the rules of origin (RoO) of a free trade agreement (FTA) affect firms' pricing strategies. The value-added criterion (VAC) of the RoO requires firms to add more than a certain level of value within an FTA when firms use inputs originating from outside the FTA. The VAC may work as a price floor, and the resulting increases in prices can benefit all firms if it induces an offshoring firm to manipulate its output price. Meanwhile, a consumer-hurting FTA formation is possible, even if all firms make tariff-free exports. Furthermore, such an FTA formation may worsen total welfare.",

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note = "Funding Information: We appreciate the three anonymous referees as well as the associate editor, Zhihong Yu, for the constructive comments and suggestions. We also appreciate Carsten Eckel and Andreas Haufler for their comments and suggestions. Hiroshi Mukunoki acknowledges the financial support of the JSPS KAKENHI (Grant Numbers JP16H03620 and JP17K03706). Hirofumi Okoshi acknowledges financial support from Deutsche Forschungsgemeinschaft (German Science Foundation, GRK1928). Publisher Copyright: {\textcopyright} 2021 The Authors. The World Economy published by John Wiley & Sons Ltd.",

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N2 - This study examines how the rules of origin (RoO) of a free trade agreement (FTA) affect firms' pricing strategies. The value-added criterion (VAC) of the RoO requires firms to add more than a certain level of value within an FTA when firms use inputs originating from outside the FTA. The VAC may work as a price floor, and the resulting increases in prices can benefit all firms if it induces an offshoring firm to manipulate its output price. Meanwhile, a consumer-hurting FTA formation is possible, even if all firms make tariff-free exports. Furthermore, such an FTA formation may worsen total welfare.

AB - This study examines how the rules of origin (RoO) of a free trade agreement (FTA) affect firms' pricing strategies. The value-added criterion (VAC) of the RoO requires firms to add more than a certain level of value within an FTA when firms use inputs originating from outside the FTA. The VAC may work as a price floor, and the resulting increases in prices can benefit all firms if it induces an offshoring firm to manipulate its output price. Meanwhile, a consumer-hurting FTA formation is possible, even if all firms make tariff-free exports. Furthermore, such an FTA formation may worsen total welfare.

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Rules of origin and consumer-hurting free trade agreements*

Abstract

Keywords

ASJC Scopus subject areas

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