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David Tsirekidze
Job Market Candidate
Stanford University
Department of Economics
579 Serra Mall
Stanford, CA 94305
650-739-5925
david19@stanford.edu
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Working Papers
Global Supply Chains, Trade Agreements and Rules of Origin (Job Market Paper)
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 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 liberalizing 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.
Rules of Origin in Customs Unions and Global Free Trade
Similar to FTAs,
CUs too come with restrictions on the use of intermediate inputs in order for final goods to qualify for free
trade. In a three-country CU 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. A CU nonmember country enjoys an indirect benefit from CU
through intermediate inputs while maintaining a protected domestic market. RoO can solve this problem
by limiting this free riding.
In the case of asymmetric countries, two forces prevent global free trade: a) free riding b) exclusion
motive - the smaller countries prefer to exclude the larger country from their CU and impose jointly optimal
import tariffs. These two different effects generate the different impacts that RoO might have in CUs. RoO
can deal with the free riding problem but cannot deal with the exclusion problem. RoO will make global
free trade even less likely when the exclusion motive is binding. This implies that RoO do not always help
to get to global free trade. For a relatively larger degree of globalization, 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. But, for a smaller degree of globalization level, the exclusion motive is stronger than the
free riding effect and RoO make global free trade even less likely. So, the parameter space admitting global free trade as an equilibrium can shrink due to RoO. Therefore, it is shown that RoO can have helpful or
detrimental effect on attaining global free trade, depending on the degree of globalization. In this way, it is
established that CUs (with or without RoO), do not always represent ‘building blocks’ towards global free
trade.
Trade Restrictions and Labor Productivity: Evidence from the Georgian Wine Industry
Russia, the Republic of Georgia’s largest neighbor and trading partner, started
imposing economic sanctions on Georgia beginning in early 2006, by restricting the import of Georgian
wine to Russia. I exploit this natural experiment to estimate the effects of the embargo on the Georgian
wine industry. I show that the trade ban actually increased the productivity of wine producers. Not only
did average labor productivity increase during the embargo the entire productivity distribution shifted to
the right. The reason Georgian firms became more competitive is that they had to export to relatively
unknown and more competitive markets. The trade restriction served as a facilitating force for reverse
trade diversion. The following two main sources of improvement happened to be important. First, firms
substantially decreased their employment during the embargo as they let the least productive workers leave.
And second, the expenses on the intermediate inputs per liter of wine increased dramatically during the
embargo, which led firms to produce better wine. The embargo positively affected exporters’ productivity.
Interestingly, the embargo did (indirectly) affect domestic producers as well. This can be explained by the
fact that non-exporters were competing with highly productive exporters in the domestic market. This way
the embargo positively affected the productivity of the whole industry.
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