fbpx The Laffer Curve for Rules of Origin | Harvard Kennedy School

Additional Authors:

  • Marc Melitz


October 9, 2022, Paper: "We analyze how heterogeneous firms in a regional trade area (RTA) respond to rules of origin (RoO). Firms can source a continuum of inputs from both within and outside the RTA, and choose whether to comply with the RoO or pay a tariff penalty. We show how a Laffer curve for RoOs arises naturally in this setting: stricter content requirements initially expand regional part sourcing, but contract it when set at levels above a threshold. The parameters of the model are fit to data on regional part cost shares for all autos sold in North America. The calibrated model quantifies the impact of stricter RoOs imposed by the 2020 revision to NAFTA (USMCA). The stricter content requirement (62.5% to 75%) would raise employment by only 1.2%, while increasing auto prices assembled in the region by 0.3%. The higher requirement initially proposed by U.S. negotiators (85%) would lead to both higher prices and lower employment."