The name is absent

Rules of Origin and Gains from Trade

Earl L. Grinols* and Peri Silva^

May 2008

Abstract

This paper identifies the most restrictive limit that rules of origin can enforce and still
continue to guarantee gains from trade for free trade area formation in general settings.
Many commonly used rules of origin exceed this condition in practice. Second, free trade
areas generally involve unharmonized tariffs requiring rules of origin that make standard
analyses diffcult or inapplicable. We incorporate the identified welfare-supporting rules of
origin into standard existence of equilibrium proofs and prove the existence of a free trade
area equilibrium involving only within-FTA transfers that is at least as satisfactory for every
consumer worldwide as an arbitrary original world trade allocation. The analysis explains
why hub-and-spoke extensions of free trade areas cannot guarantee gains from trade for all
participants in general.

JEL classification numbers: D60, F13, F15

Keywords: Rules of origin, free trade areas, Walrasian equilibrium, welfare analysis.

*Department of Economics, Hankamer School of Business, Baylor University, One Bear Place ^98003, Waco,
Texas 76798

^Corresponding Author: Department of Economics, University of North Dakota, and Centro Studi
Luca d’Agliano. Gamble 290 Centennial Drive, Grand Forks, ND 58202; Tel. (701)777-3351; e-mail:
peri.dasilva@mail.business.und.edu. Peri Silva acknowledges financial support from CAPES-Brazil.

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