Preferential Trade Agreements and Tax Competition for Foreign Direct Investment
AbstractThis paper examines how free-trade agreements and customs unions affect the location of foreign direct investment (FDI) and social welfare, taking into account that governments may adjust taxes and external tariffs to compete for FDI. Conditions are identified under which a free-trade agreement leads to FDI and under which this improves welfare. The welfare effect is shown to depend on the relative size of efficiency gains in production and government revenue losses due to tax competition. A free-trade agreement may fail to induce welfare-improving FDI, creating a role for a customs union.
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Bibliographic InfoPaper provided by CESifo Group Munich in its series CESifo Working Paper Series with number 763.
Date of creation: 2002
Date of revision:
preferential trade agreements; tax competition; multinational enterprises;
Other versions of this item:
- Raff, Horst, 2004. "Preferential trade agreements and tax competition for foreign direct investment," Journal of Public Economics, Elsevier, vol. 88(12), pages 2745-2763, December.
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