Anti-competitive and rent-shifting aspects of domestic-content provisions in regional trade blocks
1993
Lopez-de-Silanes, Florencio | Markusen, James R. | Rutherford, Thomas Fox
Regional trade agreements must specify domestic-content rules (rules of origin) that define the conditions under which a good qualifies as 'domestic' and so may be freely traded within the block. The paper analyzes such rules, focussing in particular on oligopolistic industries in which foreign multinationals producing within the block rely much more on imported intermediate inputs than do domestic firms. In such a situation, we argue that domestic content provisions are anti-competitive, reducing overall final output of the industry, and shift rents (in the absence of free entry) to domestic firms. It is possible that the anti-competitive aspect of the rules are sufficiently strong that total industry profits rise and the equilibrium demand for the substitute domestic inputs falls (the scale effect of reduced output outweighs a substitution effect in favor of domestic intermediates). The latter effect is more likely to the extent that the foreign multinationals can switch from producing within the block to exporting to the block. These ideas are then examined numerically using an applied general-equilibrium model of the North American auto industry.
Show more [+] Less [-]AGROVOC Keywords
Bibliographic information
Publisher National Bureau of Economic Research, | Cambridge, MA : National Bureau of Economic Research, [1993]
This bibliographic record has been provided by National Agricultural Library