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North-South customs unions and international capital mobility

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  • Fernandez-Arias, Eduardo
  • Spiegel, Mark M.

Abstract

The primary distinction in a North-South trade accord is likely to be that the Southern nation experiences more capital scarcity than its Northern trade partner. So the trade accord's impact on the Southern trading partner's ability to attract capital may have welfare implications for both nations. The authors extend the traditional analysis of customs unions to allow for international capital movements. Their results indicate that trade accords may affect the ability of Southern nations to attract capital and may divert capital between Southern nations. Moreover, the welfare implications of North-South trade accords may differ from those that predict the North American Free Trade Agreement's (NAFTA) minor third-country effects, holding factor endowments constant. The key implications of North-South trade accords such as NAFTA are generally perceived to involve their impact on investment flows. The authors try to understand the channels through which trade accords can affect North-South investment flows. A potential link between trade accords and investment flows may be how the accords affect the ability of the Southern partner government to make commitments about the treatment of foreign investment. They show that these accords can affect both the magnitude and pattern of inward foreign investment and production, implying the possibility that both trade and financial diversioncan stem from a bilateral regional trade accord. Novel effects that emerge under sovereign risk must be addressed when assessing the welfare implications of trade accords. The greatest gains from integration are still achieved when integration takes place between the countries with the greatest potential gains from trade. But the authors make a distinction: these gains now include both current trade and inter-temporal trade through foreign investment.

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Bibliographic Info

Paper provided by The World Bank in its series Policy Research Working Paper Series with number 1573.

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Date of creation: 29 Feb 1996
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Handle: RePEc:wbk:wbrwps:1573

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Keywords: Environmental Economics&Policies; Economic Theory&Research; Payment Systems&Infrastructure; International Terrorism&Counterterrorism; Fiscal&Monetary Policy; Trade and Services; Economic Theory&Research; Environmental Economics&Policies; TF054105-DONOR FUNDED OPERATION ADMINISTRATION FEE INCOME AND EXPENSE ACCOUNT; Trade and Regional Integration;

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References

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  1. Kyle Bagwell & Robert W. Staiger, 1993. "Multilateral Tarriff Cooperation During the Formation of Regional Free Trade Areas," NBER Working Papers 4364, National Bureau of Economic Research, Inc.
  2. Gene M. Grossman & Elhanan Helpman, 1993. "The Politics of Free Trade Agreements," NBER Working Papers 4597, National Bureau of Economic Research, Inc.
  3. Gary Clyde Hufbauer & Jeffrey J. Schott, 1992. "North American Free Trade: Issues and Recommendations," Peterson Institute Press: All Books, Peterson Institute for International Economics, Peterson Institute for International Economics, number 71, July.
  4. Raquel Fernandez, 1997. "Returns to Regionalism: An Evaluation of Non-Traditional Gains from RTAs," NBER Working Papers 5970, National Bureau of Economic Research, Inc.
  5. Thomas, Jonathan & Worrall, Tim, 1994. "Foreign Direct Investment and the Risk of Expropriation," Review of Economic Studies, Wiley Blackwell, Wiley Blackwell, vol. 61(1), pages 81-108, January.
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  7. Bulow, Jeremy & Rogoff, Kenneth S., 1989. "A Constant Recontracting Model of Sovereign Debt," Scholarly Articles 12491028, Harvard University Department of Economics.
  8. Carlo Perroni & John Whalley, 1994. "The New Regionalism: Trade Liberalization or Insurance?," NBER Working Papers 4626, National Bureau of Economic Research, Inc.
  9. Jeremy Bulow & Kenneth Rogoff, 1998. "Sovereign Debt: Is to Forgive to Forget," Levine's Working Paper Archive 209, David K. Levine.
  10. Bagwell, Kyle & Staiger, Robert W, 1997. "Multilateral Tariff Cooperation during the Formation of Free Trade Areas," International Economic Review, Department of Economics, University of Pennsylvania and Osaka University Institute of Social and Economic Research Association, Department of Economics, University of Pennsylvania and Osaka University Institute of Social and Economic Research Association, vol. 38(2), pages 291-319, May.
  11. de Melo, Jaime & Panagariya, Arvind & Rodrik, Dani, 1993. "The new regionalism : a country perspective," Policy Research Working Paper Series, The World Bank 1094, The World Bank.
  12. Safadi, Raed & Yeats, Alexander, 1993. "The North American Free Trade Agreement (NAFTA) : its effect on South Asia," Policy Research Working Paper Series, The World Bank 1119, The World Bank.
  13. Jeremy I. Bulow & Kenneth Rogoff, 1987. "A Constant Recontracting Model of Sovereign Debt," NBER Working Papers 2088, National Bureau of Economic Research, Inc.
  14. Miyagiwa, Kaz F. & Young, Leslie, 1986. "International capital mobility and commercial policy in an economic region," Journal of International Economics, Elsevier, Elsevier, vol. 20(3-4), pages 329-341, May.
  15. McLaren, John, 1997. "Size, Sunk Costs, and Judge Bowker's Objection to Free Trade," American Economic Review, American Economic Association, American Economic Association, vol. 87(3), pages 400-420, June.
  16. Joyce Manchester & Warwick Mckibbin, 1995. "The global macroeconomics of NAFTA," Open Economies Review, Springer, Springer, vol. 6(3), pages 203-223, July.
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Cited by:
  1. Ayça Tekin-Koru & Andreas Waldkirch, 2010. "North-South Integration and the Location of Foreign Direct Investment," Review of International Economics, Wiley Blackwell, Wiley Blackwell, vol. 18(4), pages 696-713, 09.
  2. Waldkirch, Andreas, 2006. "The ‘New Regionalism’: Integration as a Commitment Device for Developing Countries," Journal of Economic Integration, Center for Economic Integration, Sejong University, Center for Economic Integration, Sejong University, vol. 21, pages 397-425.
  3. Goohoon Kwon & Raphael A. Espinoza, 2009. "Regional Financial Integration in the Caribbean," IMF Working Papers, International Monetary Fund 09/139, International Monetary Fund.
  4. Dieter M. Urban, 2006. "Multilateral Investment Agreement in a Political Equilibrium," CESifo Working Paper Series 1830, CESifo Group Munich.
  5. Popa, Ana & Oprunenco, Alex & Lücke, Matthias & Tekce, Mahmut & Eugen, Hristev & Mincu, Georgeta & Vasilescu, Victoria & Prohnitchi, Valeriu, 2009. "A free trade area between the Repbulic of Moldova and the European Union: feasibility, perspectives and potential impact," Open Access Publications from Kiel Institute for the World Economy, Kiel Institute for the World Economy (IfW) 28899, Kiel Institute for the World Economy (IfW).
  6. Tekin-Koru, Ayca & Waldkirch, Andreas, 2007. "North American Integration and the Location of Foreign Direct Investment," MPRA Paper 5212, University Library of Munich, Germany.
  7. Piazolo, Daniel, 1997. "Gaining credibility and enhancing economic growth through regional integration: The case for EU membership of Eastern Europe," Kiel Working Papers 837, Kiel Institute for the World Economy.

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