Analysis of Welfare-Improving Rules of Origin in Free Trade Agreements: The Case of Buyer Monopoly by Region's Final Goods Producers

This paper analyzes the effects of rules of origin in free trade agreements on economic welfare and the optimal level of rules of origin. In a situation where final goods producers monopolize intermediate goods produced in the region, a marginal increase in the level of the rules of origin reduces the monopoly power of final goods producers. It increases the economic welfare of the region. In this case, it is also possible to establish a free trade zone that does not reduce the economic welfare of countries outside the region and does not reduce the economic welfare of the world as a whole.