The rules of origin and global value chains conundrum

This paper studies the relationship between Global Value Chains (GVC's) and Rules of Origin (RoO's). These are two of the most prevalent features of the trade environment today but have not received a satisfying theoretical treatment, let alone one conjointly. This paper aims to fill that gap in the literature. I present a trade model with heteroge- neous firms where I introduce GVC's and RoO's. I analyse the incentives a firm faces to comply with RoO's and those it faces to operate as a GVC. I then analyse how the stages of production a GVC chooses to operate is affected by RoO's. I find that the optimal number of stages of production decreases the more restrictive the RoO is, and it increases the cheaper its foreign intermediate inputs are. Lastly, I show that, all else equal, a firm operating as a GVC has a bigger incentive to comply with RoO than an exporting firm.