Intermediate inputs and rules of origin: Implications for welfare and viability of free trade agreements

This dissertation comprises of three essays in International Economics. The first two essays address how the inclusion of an intermediate input and Rules of Origin (ROO) affect prices, welfare of members, and the political viability of Free Trade Agreements (FTAs). In the first essay, it is shown that the ROO distorts the regional price of the input. On the one hand, this increases trade diversion in the input market, while on the other it reduces trade diversion in the market of the final good using this input. Thus, the welfare effects of the ROO are ambiguous and depend on the size of the ROO and the export capacity of the final good producer. Again, under certain conditions, the ROO improves the political viability of the FTA. In particular, the input exporter who rejected the FTA in the absence of the ROO accepts it when ROO is included. However, the FTA that is voted in after ROO inclusion is undesirable in that the union's welfare deteriorates at the endorsement of the ROO-inclusive FTA.; The second essay endogenizes the ROO within the political economy model of the first essay. The equilibrium ROO at which both governments strictly vote in favor of the FTA is shown to be more stringent than an exogenous ROO at which the FTA is voted in.; The third essay empirically addresses the impact of the East-Asian crisis of 1997 on their exports. Using monthly data on key export commodities of six Asian countries, a reduced form model of exports is estimated. The demand for Asian exports is shown to be very sensitive to own as well as competitor's price, while the inverted export supply curves are basically horizontal. However, export supply prices are very sensitive to the nominal exchange rate, i.e., prices decline in response to nominal devaluation. These results imply that during the devaluations episode in East Asia, while absolute export price of each country decreased, the demand for its exports did not grow as prices of competitors' declined simultaneously. The overall effect was a sharp decline in export prices without any considerable increase in export volumes.