Offshore assembly provisions and the structure of protection

This paper derives the structure of protection afforded by tariffs that are subject to an offshore assembly provision (OAP). The effects of an OAP on the equilibrium price relationships are shown to depend on two sets of factors: the amount of domestic consumption of the final good in relation to the level of output of the domestic component and assembly industries; and the height of barriers to trade in the intermediate good compared to the tariff savings afforded by OAP exemption of domestic value-added. An interesting result is that equilibrium under an OAP scheme may entail two-way trade in identical intermediate goods.