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Rules of origin and gains from trade

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  • Earl Grinols
  • Peri Silva

Abstract

This paper identifies the most restrictive limit that rules of origin can enforce and still continue to guarantee gains from trade area formation in general settings. Many commonly used rules of origin exceed this condition in practise. Second, free trade areas generally involve unharmonized tariffs requiring rules of origin that make standard analyses difficult or inapplicable. We incorporate the identified welfare-supporting rules of origin into standard existence of equilibrium proofs and prove the existence of a free trade area equilibrium involving only within-FTA transfers that is at least as satisfactory for every consumer worldwide as an arbitrary original world for allocation. The analysis explains why hub-and-spoke extensions of free areas cannot guarantee gains from trade for all participants in general.
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  • Earl Grinols & Peri Silva, 2011. "Rules of origin and gains from trade," Economic Theory, Springer;Society for the Advancement of Economic Theory (SAET), vol. 47(1), pages 159-173, May.
    • Handle: RePEc:spr:joecth:v:47:y:2011:i:1:p:159-173
    DOI: 10.1007/s00199-010-0529-y
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    Cited by:

    1. Jaume Sempere, 2022. "On potential Pareto gains from free trade areas formation," Journal of Public Economic Theory, Association for Public Economic Theory, vol. 24(6), pages 1502-1518, December.
    2. David Tsirekidze, 2021. "Global supply chains, trade agreements and rules of origin," The World Economy, Wiley Blackwell, vol. 44(11), pages 3111-3140, November.
    3. Sung Hee Lee & Kun Soo Park & Yong Won Seo, 2016. "Multinational Firm’s Production Decisions under Overlapping Free Trade Agreements: Rule of Origin Requirements and Environmental Regulation," Sustainability, MDPI, vol. 9(1), pages 1-16, December.
    4. Earl L. Grinols & Peri Silva, 2008. "Industrial targeting in free trade areas with policy independence," Canadian Journal of Economics, Canadian Economics Association, vol. 41(3), pages 796-816, August.
    5. Yoshitomo Ogawa, 2012. "The structure of Nash equilibrium tariffs," Economic Theory, Springer;Society for the Advancement of Economic Theory (SAET), vol. 51(1), pages 139-161, September.
    6. Lutz Arnold, 2013. "Existence of equilibrium in the Helpman–Krugman model of international trade with imperfect competition," Economic Theory, Springer;Society for the Advancement of Economic Theory (SAET), vol. 52(1), pages 237-270, January.

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    More about this item

    Keywords

    Rules of origin; Existence of equilibrium; Free trade areas; Walrasian equilibrium; Welfare analysis; D60; F13; F15;
    All these keywords.

    JEL classification:

    • D60 - Microeconomics - - Welfare Economics - - - General
    • F13 - International Economics - - Trade - - - Trade Policy; International Trade Organizations
    • F15 - International Economics - - Trade - - - Economic Integration

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