CEPII, Recherche et Expertise sur l'economie mondiale
The Unintended Consequences of High Regional Content Requirements

Keith Head
Thierry Mayer
Marc Melitz

 Highlights :
  • The rules of origin of RTAs naturally create a Laffer Curve
  • We quantify those predictions for cars in the USMCA and TCA cases
  • There are negative welfare effects even before the top of the Laffer curve

 Abstract :
Rules of origin (RoOs) are a common feature of regional trade agreements that fall short of full custom unions. Two of the most important trade agreements, the North American Free Trade Agreement (NAFTA) and the European Union (EU), recently enacted major changes to those rules. The 2020 USMCA agreement replacing NAFTA made those rules much stricter. Meanwhile, following its exit from the EU customs union, Britain and the remaining EU27 had to draw up new rules of origin for the EU-UK Trade and Cooperation Agreement (TCA). This paper quantifies the main trade-offs involved in setting the strictness of RoOs in the context of the automobile industry. A more stringent agreement can raise or lower regional parts production, but it inevitably raises prices. Fitting our model to data on the use of NAFTA-origin parts in cars assembled within the region, we calibrate the key parameters that govern the responses to stricter RoOs. We then apply the calibrated model to evaluate the switch from NAFTA to the USMCA as well as other counterfactuals of interest.

 Keywords : Regional Agreements | Rules of Origin | Cars

 JEL : F1
CEPII Working Paper
N°2023-06, March 2023

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 Fields of expertise

Trade & Globalization