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Foreign Direct Investment, Endogenous Tariffs, and Preferential Trade Agreements

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Author Info
Emily Blanchard (University of Virginia)

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Abstract

This paper examines the complementarity between international trade and investment policies, and argues that preferential trade agreements may be a particularly effective means for harnessing the tariff liberalizing potential of foreign direct investment. A simple two country model demonstrates that export-platform foreign investment induces unilateral tariff liberalization by the investment-source country, suggesting that international capital mobility may substitute partially for multilateral forums such as the WTO in achieving efficient tariffs. A multi-country extension of the model in which countries can compete for foreign investors via subsidies then develops an efficiency argument in favor of discriminatory tariff allowances such as Article XXIV of the GATT or the Generalized System of Preferences. When small countries can earn preferential tariff treatment from a large trading counterpart by encouraging local export-platform investment (or by discouraging import competing investment), the equilibrium tariff level will be lower when discriminatory tariffs are possible rather than when they are not.

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Publisher Info
Article provided by Berkeley Electronic Press in its journal Advances in Economic Analysis & Policy.

Volume (Year): 7 (2007)
Issue (Month): 1 ()
Pages: 1800-1800
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Related research
Keywords: FDI MFN preferential trade agreements optimal tariffs

Find related papers by JEL classification:
F11 - International Economics - - Trade - - - Neoclassical Models of Trade

References listed on IDEAS
Please report citation or reference errors to , or , if you are the registered author of the cited work, log in to your RePEc Author Service profile, click on "citations" and make appropriate adjustments.:

  1. Emily Blanchard, 2006. "Reevaluating the Role of Trade Agreements: Does Investment Globalization Make the WTO Obsolete?," CESifo Working Paper Series CESifo Working Paper No. , CESifo GmbH. [Downloadable!]
  2. McLaren, John, 1997. "Size, Sunk Costs, and Judge Bowker's Objection to Free Trade," American Economic Review, American Economic Association, vol. 87(3), pages 400-420, June. [Downloadable!] (restricted)
  3. Kyle Bagwell & Robert W. Staiger, 1999. "An Economic Theory of GATT," American Economic Review, American Economic Association, vol. 89(1), pages 215-248, March. [Downloadable!] (restricted)
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  4. J. Peter Neary, 1995. "Factor Mobility and International Trade," Canadian Journal of Economics, Canadian Economics Association, vol. 28(s1), pages 4-23, November.
    Other versions:
  5. Devereux, Michael B. & Min Lee, Khang, 1999. "Endogenous trade policy and the gains from international financial markets," Journal of Monetary Economics, Elsevier, vol. 43(1), pages 35-59, February. [Downloadable!] (restricted)
  6. Baier, Scott L. & Bergstrand, Jeffrey H., 2004. "Economic determinants of free trade agreements," Journal of International Economics, Elsevier, vol. 64(1), pages 29-63, October. [Downloadable!] (restricted)
  7. William C. Gruben, 2001. "Did NAFTA really cause Mexico's high maquiladora growth?," Center for Latin America Working Papers 0301, Federal Reserve Bank of Dallas. [Downloadable!]
  8. Devereux, Michael B, 1997. "Growth, Specialization, and Trade Liberalization," International Economic Review, Department of Economics, University of Pennsylvania and Osaka University Institute of Social and Economic Research Association, vol. 38(3), pages 565-85, August.
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  9. Pascalis Raimondos-Møller & Alan D. Woodland, 2000. "Tariff strategies and small open economies," Canadian Journal of Economics, Canadian Economics Association, vol. 33(1), pages 25-40, February. [Downloadable!] (restricted)
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  10. Krishna, Pravin & Mitra, Devashish, 2005. "Reciprocated unilateralism in trade policy," Journal of International Economics, Elsevier, vol. 65(2), pages 461-487, March. [Downloadable!] (restricted)
  11. Chisik, Richard, 2003. "Gradualism in free trade agreements: a theoretical justification," Journal of International Economics, Elsevier, vol. 59(2), pages 367-397, March. [Downloadable!] (restricted)
  12. Wilfred J. Ethier, 1998. "Regionalism in a Multilateral World," Journal of Political Economy, University of Chicago Press, vol. 106(6), pages 1214-1245, December. [Downloadable!] (restricted)
  13. Goh, Ai Ting & Olivier, Jacques, 2002. "Free Trade and Protection of Intellectual Property Rights: Can We Have One Without the Other?," CEPR Discussion Papers 3127, C.E.P.R. Discussion Papers. [Downloadable!] (restricted)
  14. Brecher, Richard A. & Findlay, Ronald, 1983. "Tariffs, foreign capital and national welfare with sector-specific factors," Journal of International Economics, Elsevier, vol. 14(3-4), pages 277-288, May. [Downloadable!] (restricted)
  15. Furusawa, Taiji & Lai, Edwin L. -C., 1999. "Adjustment costs and gradual trade liberalization," Journal of International Economics, Elsevier, vol. 49(2), pages 333-361, December. [Downloadable!] (restricted)
  16. Bond, Eric W & Park, Jee-Hyeong, 2002. "Gradualism in Trade Agreements with Asymmetric Countries," Review of Economic Studies, Blackwell Publishing, vol. 69(2), pages 379-406, April.
  17. Amiti, Mary & Wakelin, Katharine, 2003. "Investment liberalization and international trade," Journal of International Economics, Elsevier, vol. 61(1), pages 101-126, October. [Downloadable!] (restricted)
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Cited by:
(explanations, Please report citation or reference errors to , or , if you are the registered author of the cited work, log in to your RePEc Author Service profile, click on "citations" and make appropriate adjustments.)

  1. Neary, J Peter, 2006. "Trade Costs and Foreign Direct Investment," CEPR Discussion Papers 5933, C.E.P.R. Discussion Papers. [Downloadable!] (restricted)
    Other versions:
  2. Masahiro Endoh, 2005. "Cross-Border Political Donations and Pareto-Efficient Tariffs," Working Papers 915, Economic Growth Center, Yale University. [Downloadable!]
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