Global supply chains, trade agreements and rules of origin

Abstract

Free Trade Agreements (FTAs) usually come with restrictions on the use of intermediate inputs in order for final goods to qualify for free trade. I focus on Rules of Origin (RoO), which limit expenses on nonmember country's intermediate inputs. In a three‐country FTA formation game, I introduce international trade in intermediate inputs and RoO restrictions. In the case of symmetric countries, I show that as countries become more involved in global supply chains, measured by their input shares in foreign final goods production, global free trade is less likely to be a stable equilibrium outcome. Free riding is the main problem preventing countries from liberalising trade. Countries are better off being nonmembers of FTAs between the other two countries relative to global free trade. Rules of Origin can solve this problem by limiting the benefits countries get from other countries' free trade agreements. In the case of asymmetric countries, an additional incentive exists for the smaller country not to join: such a country gives up more than it gains from joining an FTA for a sufficiently high degree of asymmetry in country sizes. I show that global free trade is a stable Nash equilibrium under a larger region of asymmetric country parameter space in the case of RoO than without it. Therefore, it is shown that RoO is essential in order to attain global free trade.

Neo-institutionalism in supply chain management: from supply chain susceptibility to supply chain resilience

“…In particular, we identify patterns how a mature field of manifested pre-COVID-19 global supply chains, represented by rather stable logics, shifts to a field that is entered by new ideas and associated actors and organizations, thus leading to new multiple demands for supply chains and consequently to a higher supply chain susceptibility. From a neo-institutional viewpoint, we argue that pre-COVID-19 supply chains were predominantly characterized by relatively stable inter-organizational relationships where institutional complexity and supply chain susceptibility can be regarded as low (Mena et al, 2013;Purdy et al, 2019) for two reasons: Firstly, while pre-COVID-19 global supply chains were subject to worldwide competition resulting in regular adjustments in global material flows, the changes consisted of regularized practices and legitimized rules and standards (Lawrence and Phillips, 2004;Tsirekidze, 2021). Secondly, although the rise of emerging economies, particularly in South-East Asia, has led to country shifts in manufacturing and production, global trade flows were transparent and identifiable due to the long-term planning involved (Pache and Santos, 2013;Pahl et al, 2022).…”