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 |
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Pages (from-to) | 2303-2318 |
Number of pages | 16 |
Journal | World Economy |
Volume | 44 |
Issue number | 8 |
DOIs | |
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