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On the Welfare Effect of FTAs in the Presence of FDIs and Rules of Origin

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  • MUKONOKI Hiroshi

Abstract

This paper investigates the welfare effect of forming free trade agreements (FTAs) in an international oligopoly model with cost heterogeneity. To receive tariff-free treatment, firms must comply with the rules of origin (ROO) that require them to use a certain fraction of the parts and intermediates produced within the FTA. Firms producing outside of the FTA could undertake either market-oriented or export-platform foreign direct investment (FDIs). The presence of ROO has the following potential effects: (i) making an initially infeasible FTA become feasible by deterring outside firms from undertaking FDI, (ii) inducing an export-platform FDI of a less efficient firm to replace a market-oriented FDI of an efficient firm, or (iii) discharging FDIs made before the FTA was formed and deterring all possible FDIs. These potential effects complicate the welfare effect of FTAs and could decrease consumer surplus in member countries.

Suggested Citation

  • MUKONOKI Hiroshi, 2013. "On the Welfare Effect of FTAs in the Presence of FDIs and Rules of Origin," Discussion papers 13053, Research Institute of Economy, Trade and Industry (RIETI).
    • Handle: RePEc:eti:dpaper:13053
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    References listed on IDEAS

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    Cited by:

    1. Jinji, Naoto & Mizoguchi, Yoshihiro, 2016. "Rules of origin and technology spillovers from foreign direct investment under international duopoly," Japan and the World Economy, Elsevier, vol. 40(C), pages 47-60.

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