ECONOMIC INTEGRATION AND RULES OF ORIGIN UNDER INTERNATIONAL OLIGOPOLY∗

Free trade agreements (FTAs) have rules of origin (ROOs) to prevent tariff circumvention by firms of nonmember countries. This article points out that in imperfectly competitive markets, ROOs have another role overlooked in the existing literature. Instead of focusing on the impacts of ROOs in the intermediategood markets, we draw our attention to the final-good markets to examine the effects of ROOs.We find that under some conditions, ROOs benefit both firms at the expense of consumers. Under some other conditions, ROOs benefit the firm producing outside the FTA and hurt the firm producing inside the FTA.