Applied general equilibrium model of North American integration with rules of origin

The thesis presents a three-country, multisector computational general equilibrium technique for analyzing the economic effects of the North American integration in the presence of rules of origin. Rules of origin determine which products originate from the region and, thus, qualify for preferential customs duties. The rationale for this technique is that rules of origin are an integral part of free trade agreements and therefore, can not be ignored in the economic analyses of free trade areas. The economic justification for rules of origin is that they are needed to prevent trade deflection.; Rules of origin induce efficiency costs in production and restrict market access. However, applied models that evaluate the effects of NAFTA ignore these adverse effects of rules of origin and hence, tend to overestimate the benefits of integration.; The quantitative results derived from the simulations indicate that the NAFTA rules of origin dilute the economic gains from integration, and that welfare costs are more serious for the two smaller countries: Canada and Mexico. The United States is more able to absorb the distortionary effects of rules of origin due to her economic size. The thesis argues that with the significant improvements in multilateral trade negotiations in recent years, the economic arguments for rules of origin have been substantially weakened.; The estimated welfare costs of rules of origin provide a motivation to explore alternative forms of integration for the region. The second part of the thesis assesses the potential gains of integration if rules of origin were completely eliminated. This requires that the region adopts a unified system of trade policies regarding the rest of the world. The simulated impacts of moving from a free trade area to a regime of harmonized external trade policies are quite significant. The results indicate that the benefits of integration could be maximized if external tariffs in the North American countries were harmonized at reasonably low levels.