Rules of Origin and Gains from Trade

19 Pages Posted: 25 Mar 2009

See all articles by Earl L. Grinols

Earl L. Grinols

Baylor University - Department of Economics

Peri Silva

University of North Dakota

Date Written: June 1, 2008

Abstract

This paper identifies the most restrictive limit that rules of origin can enforce and still continue to guarantee gains from trade for free trade area formation in general settings. Many commonly used rules of origin exceed this condition in practice. 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 ruels 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 trade allocation. The analysis explains why hub-and-spoke extensions of free trade areas cannot guarantee gains from trade for all participants in general.

Keywords: rules of origin, free trade areas, Walrasian equilibrium, welfare analysis

JEL Classification: D60, F13, F15

Suggested Citation

Grinols, Earl L. and Silva, Peri, Rules of Origin and Gains from Trade (June 1, 2008). Centro Studi Luca d'Agliano Development Studies Working Paper No. 249, Available at SSRN: https://ssrn.com/abstract=1367727 or http://dx.doi.org/10.2139/ssrn.1367727

Earl L. Grinols

Baylor University - Department of Economics ( email )

P.O. Box 98003
Waco, TX 76798-8003
United States
(254) 710-7522 (Phone)
(254) 710-6142 (Fax)

Peri Silva (Contact Author)

University of North Dakota ( email )

Box 8366
Grand Forks, ND 58202
United States

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