Working Paper: CEPR ID: DP15897
Authors: Wanyu Chung; Carlo Perroni
Abstract: We study how regional content requirements in Free Trade Areas (FTAs) affect market power and market structure in concentrated intermediate goods markets. We show that content requirements increase oligopolistic markups beyond the level that would obtain under an equivalent import tariff, and we document patterns in Canadian export data and US producer price data that align with the model's predictions: producers of intermediate goods charge comparatively higher prices when the associated final goods producers are more constrained by FTA origin requirements and by Most Favoured Nation (MFN) tariffs for both intermediate and final non-FTA goods.
Keywords: free trade areas; content requirements; market power
JEL Codes: F12; F13; F14; D43
Edges that are evidenced by causal inference methods are in orange, and the rest are in light blue.
| Cause | Effect |
|---|---|
| regional content requirements (R50) | oligopolistic markups (D43) |
| stricter content requirements (M38) | higher pricing power for oligopolistic producers (D43) |
| binding regional value content requirements (R33) | higher export unit values for Canadian exports to the US (O51) |
| higher domestic content requirement (F18) | stricter content requirements (M38) |
| lower input tariffs (F13) | stricter content requirements (M38) |
| higher output tariffs (F14) | stricter content requirements (M38) |
| binding rules of origin (F55) | limits pro-competitive effects of preferential trade liberalization (F13) |