Trade in intermediate inputs, customs unions, and global free trade

Review of International Economics
02.03.2019

In this article—published in the Review of International Economics—Edgeworth Principal Consultant Dr. David Tsirekidze, in a three-country customs union (CU) formation game, introduces international trade in intermediate inputs and rules of origin (RoO) restrictions. In the case of symmetric countries, Dr. Tsirekidze shows that as countries become more involved in global supply chains, global free trade is less likely to be a stable equilibrium outcome.

RoO can help solve this problem. However, in the case of asymmetry, depending on the degree of the globalization, free riding (for high degree) or exclusion motive (for low degree) prevents global free trade. Correspondingly, Dr. Tsirekidze’s research shows that, depending on the degree of globalization, RoO can have helpful or detrimental effects on attaining global free trade.

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