Review of Industrial Organization 18: 127–131, 2001.
© 2001 Kluwer Academic Publishers. Printed in the Netherlands.
NAFTA as a Means of Raising Rivals’ Costs: A
W. CHARLES SAWYER
Department of Economics and International Business, University of Southern Mississippi,
Hattiesburg, MS, 39406-5072, U.S.A.
Abstract. The purpose of this comment is to clarify and extend a recent paper entitled “NAFTA as a
Means of Raising Rivals Costs”. The paper indicates that the complexity of complying with the rules
of NAFTA may lead to a decrease in competition in the domestic market. The comment shows that
the complexity of NAFTA is related to the rules of origin which are a part of virtually any free-trade
agreement. Since rules of origin are a necessary part of virtually any trade agreement, the conclusions
of the paper are not restricted to NAFTA but can be generalized to a large part of international trade.
Key words: NAFTA, rules of origin.
A recent article in this journal entitled “NAFTA as a Means of Raising Rivals
Costs” by Craig A. Depken, II and Jon M. Ford raises several points. First, the
authors indicate that there are nontrivial costs associated with obtaining the duty-
free beneﬁts of NAFTA. Under NAFTA ﬁrms may voluntarily choose whether or
not to comply with the paperwork requirements necessary to obtain these beneﬁts.
These costs may act in such a way as to raise the costs of some ﬁrms relative
to others. In some cases this could lead to ﬁrms being driven out of the market.
Finally, this obviously could lead to a decrease in competition in the domestic
industry. The purpose of this comment is twofold. First, the authors seem uncertain
as to why the costs of obtaining the beneﬁts under NAFTA are so complex.
primary purpose of this comment is to clarify the reasons for the high compliance
costs. The second purpose of the comment is to indicate that the effects the authors
describe in their paper are not NAFTA speciﬁc. This means that the paper has much
broader signiﬁcance than perhaps the authors realized. The next section discusses
the role of rules of origin in international trade. The ﬁnal section indicates the
generality of the conclusions reached in the paper.
See Depken and Ford (1999, p. 104). The relevant sentence is “On the surface it is not clear why
the writers of NAFTA would require such compliance before reduced tariff rates are applicable to a
transaction between agents in NAFTA countries”.