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Rules of origin and consumer‐hurting free trade agreements *
Author(s) -
Mukunoki Hiroshi,
Okoshi Hirofumi
Publication year - 2021
Publication title -
the world economy
Language(s) - English
Resource type - Journals
SCImago Journal Rank - 0.594
H-Index - 68
eISSN - 1467-9701
pISSN - 0378-5920
DOI - 10.1111/twec.13097
Subject(s) - tariff , offshoring , economics , value (mathematics) , free trade agreement , welfare , rules of origin , international economics , microeconomics , work (physics) , international trade , free trade , business , outsourcing , market economy , marketing , mechanical engineering , machine learning , computer science , engineering
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.