Working Papers

Rules of Origin (RoOs) are a prevalent component of Free Trade Agreements (FTAs), serving as prerequisites that firms in member countries must fulfill to qualify for tariff reductions on their intra-regional exports. I focus on the automotive sector, where Regional Content Requirements (RCRs) increased on average by 16 p.p. relative to NAFTA’s average of 53%. Leveraging a new dataset on Mexican firm-to-firm trade, I developed an origin calculator to show three main findings. Firstly, the Mexican value chain exhibits strong interconnectedness, with 30% of firms serving 10 or more assemblers and contributing to a third of the transaction volume. Secondly, car part producers stand out as the most affected group within the value chain, experiencing a threefold decrease in compliance rates compared to car assemblers. Thirdly, the steep increase in RCRs is ameliorated by the roll-up provision, particularly in the realm of super-core parts and components—a provision that has recently been the subject of dispute among the FTA partners. Lastly, had the USMCA’s dispute settlement panel ruled in favor of the US interpretation, the compliance rate would have halved, in contrast to the estimated 18% decrease when the super-core roll-up is allowed.

When does a shock to a production network change who trades with whom, and not only how much? We develop a firm-to-firm trade model in which a link is worth more or less depending on the links around it, so the network itself is an equilibrium outcome. In the model, a firm’s extensive margin (which links it keeps or adds) and its intensive margin (how much flows on each link) come from the same decision. A small shock moves quantities along existing links. A shock large enough moves the network: links break and new ones form. We characterize this threshold for a single link and study it for the network as a whole. We ask how firms that form links trade the efficiency gains of interconnection against exposure to their partners’ shocks, and how input-output cycles shape where the resulting network is resilient and where it is fragile. We take the model to the universe of Mexican firm-to-firm transactions, linked to each firm’s imports and exports. From it we build model-based measures of where the network is fragile or resilient, and we use them to compare the welfare losses from the same shock across economies with different patterns of fragility.