Wake Not a Sleeping Lion: Free Trade Agreements and Decision Rights in Multinationals

Author Name MUKUNOKI Hiroshi (Gakushuin University) / OKOSHI Hirofumi (Okayama University)
Creation Date/NO. April 2021 21-E-036
Research Project Economic Policy Issues in the Global Economy
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Free trade agreements (FTAs) with rules of origin (ROO) affect the location of input production for vertically integrated, multinational enterprises (MNEs). FTA-induced relocation changes the allocation of decision rights within MNEs and the purpose of transfer pricing from avoiding high taxes to strengthening their product-market competitiveness. This study shows that an FTA with ROO may hurt both MNEs and local firms despite tariff elimination, when the relocation occurs and the decision rights change from centralized to decentralized. Moreover, such an FTA can hurt consumers. Nevertheless, ROO increase the feasibility of FTAs thanks to larger tax revenues.