Costs of Utilizing Regional Trade Agreements

This paper proposes a method of quantifying the additional fixed cost to exporters of taking advantage of regional trade agreements (RTAs). Such additional fixed costs can be measured by the ratio of fixed costs resulting from preference utilization to those associated with non-preferential export activities, or "fixed cost ratio (FCR)." Our method is built on a model of international trade where heterogeneous exporters decide what tariff schemes to use. By applying our method to Japan's imports from RTA partner countries, we obtain the median estimate for FCR of 0.04-0.08, implying that RTA utilization imposes fixed cost increases of 4-8%. Furthermore, we demonstrate that the reduction of the FCR by half raises the RTA utilization rate by 22 percentage points. We also compute the change in procurement costs resulting from compliance with RTA rules of origin. Our estimate of the change is two percent of per-unit production cost. Then, we simulate the complete elimination of these additional procurement costs, which had the impact of a 20 percentage point rise in RTA utilization rate.