On potential Pareto gains from free trade areas formation

This paper extends the results of Grinols and Silva to free trade areas with rules of origin requiring a minimum national content. In our model, producers of a member country may decide not to comply with rules of origin and to pay tariffs to export to other members. To ensure trade gains, firms in any member country must be allowed to export to other members paying tariffs not higher than before signing the agreement if they do not comply with rules of origin. The specific tariff revenue is rebated lump-sum to consumers, ensuring they can afford their status quo consumption plans.

Automated summary

This paper extends the findings of Grinols and Silva to free trade areas that have rules of origin which stipulate a minimum national content requirement. In this model, producers from a member country may opt not to comply with the rules of origin and choose to pay tariffs when exporting to other member countries. To ensure trade gains, firms from any member country should be allowed to export to other members while paying tariffs that are not higher than before the agreement was signed, even if they do not comply with the rules of origin. The tariff revenue collected is then refunded to consumers in a lump sum manner in order to maintain their current consumption plans.