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Exchange Rate and Utilization of Free Trade Agreements: Focus on rules of origin

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  • HAYAKAWA Kazunobu
  • Han-Sung KIM
  • YOSHIMI Taiyo

Abstract

This paper investigates how exchange rates affect the utilization of a free trade agreement (FTA) scheme considering the importance of rules of origin (RoOs). Exchange rates affect exporters' compliance with RoOs by changing the so-called value-added ratio, which is defined as [1 - (Non-originating input price / Export product price)]. We present theoretical underpinnings on this potential linkage with a model of pricing-to-market and provide an empirical examination using rich tariff-line-level data on the utilization of FTA schemes in Korea's imports from the Association of Southeast Asian Nations (ASEAN) countries. The theoretical framework proposes that a depreciation of exporters' currency against importers' currency enhances FTA utilization by improving the value-added ratio, and such effects are stronger for products with higher demand elasticity. We also show strong empirical support for our theoretical predictions.

Suggested Citation

  • HAYAKAWA Kazunobu & Han-Sung KIM & YOSHIMI Taiyo, 2017. "Exchange Rate and Utilization of Free Trade Agreements: Focus on rules of origin," Discussion papers 17007, Research Institute of Economy, Trade and Industry (RIETI).
    • Handle: RePEc:eti:dpaper:17007
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    Cited by:

    1. Kuo‐I Chang & Kazunobu Hayakawa & Nuttawut Laksanapanyakul & Dionisius Narjoko & Ju Hyun Pyun & Francis Quimba, 2022. "Determinants of regional trade agreement utilisation: Evidence from multiple import countries in Asia," The World Economy, Wiley Blackwell, vol. 45(6), pages 1713-1736, June.
    2. Cariola, Gianmarco & Lanz, Rainer, 2022. "Preference utilization in the global economy: An empirical analysis," WTO Staff Working Papers ERSD-2022-4, World Trade Organization (WTO), Economic Research and Statistics Division.
    3. Sasidaran Gopalan & Luu Nguyen Trieu Duong & Ramkishen S. Rajan, 2020. "Trade configurations in Asia: Assessing de facto and de jure regionalism," The World Economy, Wiley Blackwell, vol. 43(4), pages 1034-1058, April.
    4. repec:era:eriabk:2021-impact-of-the-atiga-on-intra-asean-trade is not listed on IDEAS
    5. Christopher M. Dent, 2021. "Trade, Climate and Energy: A New Study on Climate Action through Free Trade Agreements," Energies, MDPI, vol. 14(14), pages 1-30, July.

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    JEL classification:

    • F1 - International Economics - - Trade
    • F3 - International Economics - - International Finance

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