Kazuhiro Takauchi

The Effects of Strategic Subsidies under FTA with ROO

This paper presents a model of a free trade area (FTA) with rules of origin (ROO) under an oligopolistic final goods market. Following the existing literature, we also consider ROO to serve as a protectionist device and mainly focus on the interaction between ROO and the subsidy policy. A paradoxical result is considered: if the government of the final goods exporter within the FTA is the first mover, it chooses export tax. Furthermore, we show that the profit of a firm located in the FTA increases due to a reduction in the external tariff.

Rules of origin and uncertain compliance cost

Abstract This study considers the role of the cost uncertainty associated with meeting the rules of origin (ROO) in a free trade area/agreement (FTA). While the literature tends to overlook the cost uncertainties of ROO compliers, we show that the uncertain production costs resulting from meeting the ROO yield the coexistence of compliers and non-compliers in symmetric oligopoly firms. We also show that the regime in which compliers and non-compliers coexist is not the best one for an FTA importer, while it may be the best one for world welfare. We also discuss the case that uncertain production costs are firm-specific.