Trade in intermediate inputs, customs unions, and global free trade
Corresponding Author
David Tsirekidze
Edgeworth Economics, Washington, District of Columbia
Correspondence
David Tsirekidze, Edgeworth Economics, 1111 19th Street NW, Suite 200, Washington, DC.
Email: dtsirekidze@edgewortheconomics.com
Search for more papers by this authorCorresponding Author
David Tsirekidze
Edgeworth Economics, Washington, District of Columbia
Correspondence
David Tsirekidze, Edgeworth Economics, 1111 19th Street NW, Suite 200, Washington, DC.
Email: dtsirekidze@edgewortheconomics.com
Search for more papers by this authorAbstract
In a three-country customs union (CU) formation game, I introduce international trade in intermediate inputs and rules of origin (RoO) restrictions. In the case of symmetric countries, I show that as countries become more involved in global supply chains, global free trade is less likely to be a stable equilibrium outcome. RoO can help solve this problem. In the case of asymmetry, depending on the degree of the globalization, free riding (for high degree) or exclusion motive (for low degree) prevents global free trade. Correspondingly, I show that RoO can have helpful or detrimental effects on attaining global free trade.
REFERENCES
- Antras, P., Fort, T. C., & Tintelnot, F. (2014). The margins of global sourcing: Theory and evidence from US firms (Technical Report). Cambridge, MA: National Bureau of Economic Research.
- Bagwell, K., & Staiger, R. W. (1999). Regionalism and multilateral tariff cooperation. In J. Piggott & A. Woodland (Eds.), International trade policy and the pacific rim (pp. 157–185). London, UK: Macmillan.
10.1007/978-1-349-14543-0_7 Google Scholar
- Bagwell, K., & Sykes, A. O. (2005). India—measures affecting the automotive sector. World Trade Review, 4(S1), 158–178.
10.1017/S147474560500128X Google Scholar
- Bernheim, B. D., Peleg, B., & Whinston, M. D. (1987). Coalition-proof Nash equilibria I. Concepts. Journal of Economic Theory, 42(1), 1–12.
- Bhagwati, J. (1993). Regionalism and multilateralism: An overview. In J. De Melo & A. Panagariya (Eds.), New dimensions in regional integration (pp. 22–51). Cambridge, U.K.: Cambridge University Press.
- Blanchard, E. J., Bown, C. P., & Johnson, R. C. (2016). Global supply chains and trade policy (Working Paper No. 21883). Cambridge, MA: National Bureau of Economic Research.
10.3386/w21883 Google Scholar
- Chang, Y. M., & Xiao, R. (2015). Preferential trade agreements between asymmetric countries: Free trade areas (with rules of origin) vs. customs unions. Japan and the World Economy, 33, 28–43.
- Conconi, P., García-Santana, M., Puccio, L., & Venturini, R. (2018). From final goods to inputs: The protectionist effect of rules of origin. American Economic Review, 108(8), 2335–2365.
- Dutta, B., & Mutuswami, S. (1997). Stable networks. Journal of Economic Theory, 76(2), 322–344.
- Falvey, R., & Reed, G. (1998). Economic effects of rules of origin. Review of World Economics, 134(2), 209–229.
- Furusawa, T., & Konishi, H. (2007). Free trade networks. Journal of International Economics, 72(2), 310–335.
- Goldberg, P. K., Khandelwal, A. K., Pavcnik, N., & Topalova, P. (2010). Imported intermediate inputs and domestic product growth: Evidence from India. The Quarterly Journal of Economics, 125(4), 1727–1767.
- Goyal, S., & Joshi, S. (2006). Bilateralism and free trade. International Economic Review, 47(3), 749–778.
- Grossman, G. M. (1981). The theory of domestic content protection and content preference. The Quarterly Journal of Economics, 96(4), 583–603.
- Hummels, D., Jørgensen, R., Munch, J., & Xiang, C. (2014). The wage effects of offshoring: Evidence from Danish matched worker–firm data. The American Economic Review, 104(6), 1597–1629.
- Johnson, R. C., & Noguera, G. (2012). Accounting for intermediates: Production sharing and trade in value added. Journal of International Economics, 86(2), 224–236.
- Ju, J., & Krishna, K. (2005). Firm behaviour and market access in a free trade area with rules of origin. Canadian Journal of Economics, 38(1), 290–308.
- Kennan, J., & Riezman, R. (1990). Optimal tariff equilibria with customs unions. Canadian Journal of Economics, 23(1), 70–83.
- Krishna, K. (2004). Understanding rules of origin (Working Paper No. 11150). Cambridge, MA: National Bureau of Economic Research.
- Lake, J. (2017). Free trade agreements as dynamic farsighted networks. Economic Inquiry, 55(1), 31–50.
- Lake, J. (2019). Dynamic formation of preferential trade agreements: The role of flexibility. Canadian Journal of Economics (forthcoming).
- Lake, J., & Yildiz, H. M. (2016). On the different geographic characteristics of free trade agreements and customs unions. Journal of International Economics, 103, 213–233.
- Missios, P., Saggi, K., & Yildiz, H. M. (2016). External trade diversion, exclusion incentives and the nature of preferential trade agreements. Journal of International Economics, 99, 105–119.
- Riezman, R. G. (1999). Can bilateral trade agreements help induce free trade. Canadian Journal of Economics, 32(3), 751–766.
- Saggi, K., Woodland, A., & Yildiz, H. M. (2013). On the relationship between preferential and multilateral trade liberalization: The case of customs unions. American Economic Journal: Microeconomics, 5(1), 63–99.
- Saggi, K., & Yildiz, H. M. (2010). Bilateralism, multilateralism, and the quest for global free trade. Journal of International Economics, 86, 26–37.
- Saggi, K., & Yildiz, H. M. (2011). Bilateral trade agreements and the feasibility of multilateral free trade. Review of International Economics, 19(2), 356–373.
- Tsirekidze, D. (2016). Global supply chains, trade agreements and rules of origin.
- Vousden, N. (1987). Content protection and tariffs under monopoly and competition. Journal of International Economics, 23(3–4), 263–282.