The Effects of Strategic Subsidies under FTA with ROO

Abstract

This paper presents a model of a free trade area (FTA) with rules of origin (ROO) under an oligopolistic final goods market. Following the existing literature, we also consider ROO to serve as a protectionist device and mainly focus on the interaction between ROO and the subsidy policy. A paradoxical result is considered: if the government of the final goods exporter within the FTA is the first mover, it chooses export tax. Furthermore, we show that the profit of a firm located in the FTA increases due to a reduction in the external tariff.

JEL Classifications:

• F12
• F13
• F15

Keywords:

• rules of origin
• free trade area
• export subsidy
• export tax
• oligopoly