The Laffer Curve for Rules of Origin
Publication information:
Head, Keith, Thierry Mayer, and Marc J. Melitz. n.d. “The Laffer Curve for Rules of Origin.”
Abstract
We analyze how heterogeneous firms in a regional trade area (RTA) respond to
rules of origin (RoO). Firms can source a continuum of inputs from both within and
outside the RTA, and choose whether to comply with the RoO or pay a tariff penalty.
We show how a Laffer curve for RoOs arises naturally in this setting: stricter content
requirements initially expand regional part sourcing, but contract it when set at levels
above a threshold. The parameters of the model are fit to data on regional part cost
shares for all autos sold in North America. The calibrated model quantifies the impact
of stricter RoOs imposed by the 2020 revision to NAFTA (USMCA). The stricter
content requirement (62.5% to 75%) would raise employment by only 1.2%, while increasing
auto prices assembled in the region by 0.3%. The higher requirement initially
proposed by U.S. negotiators (85%) would lead to both higher prices and lower employment.
rules of origin (RoO). Firms can source a continuum of inputs from both within and
outside the RTA, and choose whether to comply with the RoO or pay a tariff penalty.
We show how a Laffer curve for RoOs arises naturally in this setting: stricter content
requirements initially expand regional part sourcing, but contract it when set at levels
above a threshold. The parameters of the model are fit to data on regional part cost
shares for all autos sold in North America. The calibrated model quantifies the impact
of stricter RoOs imposed by the 2020 revision to NAFTA (USMCA). The stricter
content requirement (62.5% to 75%) would raise employment by only 1.2%, while increasing
auto prices assembled in the region by 0.3%. The higher requirement initially
proposed by U.S. negotiators (85%) would lead to both higher prices and lower employment.