Firm Behaviour and Market Access in a Free Trade Area with Rules of Origin

We study a Free Trade Area with Rules of Origin and show that there are two distinct regimes. Comparative statics results for the two regimes are exact opposites and a regime switch occurs when ROO become restrictive enough. Consequently, imports into the FTA of the intermediate good first fall and then rise while the opposite pattern occurs for imports of the final good and for the price of the domestic input. We also show that tighter ROO have opposite effects on the well-being of final versus intermediate good producers and producers inside versus outside the FTA