In this paper, economists Emanuel Ornelas and John L. Turner demonstrate that tighter rules of origin (RoO) in free trade agreements (FTAs) can increase aggregate welfare. They consider a scenario where both input “suppliers” and “producers” of final goods belong to the same FTA. The “producers” can source inputs from FTA “suppliers” or from a competitive world market. However, RoO stipulates a greater market access for final goods only if a sufficiently high fraction of inputs is sourced within the FTA. The authors argue that stricter RoO induces productive “suppliers” with low marginal production costs to invest in inputs for final goods’ production. This is because stricter RoO is an assurance to high-productivity “suppliers” that their inputs will be purchased by the vertical “producers”, thereby minimising the chances of hold-up problem. A lenient RoO will displace high-productivity “suppliers” with low-productivity ones that have high marginal production costs. “Producers” facing less stringent RoO have two options: sourcing costly inputs within the FTA and selling final goods at high prices to FTA members, or accessing inputs at globally competitive prices outside the FTA. In the former case, imports of final goods are costly, while in the latter, the "suppliers" don't benefit from FTA as their export possibilities diminish. Consequently, the authors argue that lenient RoO leads to a welfare loss.