Journal of Industry, Competition and Trade

, Volume 14, Issue 2, pp 287–302 | Cite as

Rules of Origin and Strategic Choice of Compliance

Article

Abstract

This paper examines how an input supplier’s monopoly power affects exporters’ choice between compliance and noncompliance with rules of origin (ROO) in a free trade area (FTA). When the regional input supplier has monopoly power, the number of compliers largely affects the input price. This is because to meet ROO, exporters must use a certain ratio of the input originated within the area. In such a case, each exporter has an incentive to choose noncompliance with ROO if the rival exporter complies. Because this incentive yields strategic substitution between symmetric exporters, the coexistence of the complier and the non-complier appears in equilibrium. Our model consists of three final-good producers (one in an importing country and two in an exporting country) and one input supplier, which is in the importing country and has monopoly power. We show that within the range of parameter values for which some exporters comply with ROO, the content rate affects the output of the final-good producer in the importing country and the country’s welfare in a U-shaped fashion. The content rate levels that allow the coexistence of the complier and the non-complier minimize welfare.

Keywords

Rules of origin (ROO) Monopolistic input supplier Compliance Free trade area (FTA) 

JEL Classification

F12 F13 F15 L13 

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Copyright information

© Springer Science+Business Media New York 2013

Authors and Affiliations

  1. 1.Faculty of Economics, Management and Information ScienceOnomichi City UniversityOnomichi-CityJapan

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