TRADE-POLICY SUBTLETIES WITH MULTINATIONAL FIRMS

Regional trade blocks must specify domestic-content rules that define the conditions under which a good qualifies as 'domestic' and so may h e freely traded within the block. This paper analyzes such rules, focu ssing on oligopolistic industries in which foreign multinationals rely much more on imported intermediate inputs that do domestic firms. In such a situation, we argue that domestic content provisions are anti-c ompetitive, reducing overall final output of the industry, and shiftin g rents to domestic firms. These ideas are examined analytically and t hen numerically using an applied general-equilibrium model of the Nort h American auto industry.