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Tariff Reductions in the Presence of Foreign Direct Investment

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  • Olarreaga, Marcelo

Abstract

This paper argues that the welfare effects of trade liberalization in the presence of foreign direct investment obtained under perfect competition cannot be extended to imperfectly competitive markets. In the Heckscher-Ohlin model, trade liberalization may be paradoxically immiserizing when the traditional welfare-increasing result is corrected for the change in foreign capital revenue. Under imperfect competition this cannon occur, except under rather implausible assumptions. Indeed, a tariff reduction is expected to increase welfare when the welfare indicator is corrected for the presence of foreign capital, regardless of the type of market structure and the form of competitive rivalry. Copyright 1996 by Blackwell Publishing Ltd.

Suggested Citation

  • Olarreaga, Marcelo, 1996. "Tariff Reductions in the Presence of Foreign Direct Investment," Review of International Economics, Wiley Blackwell, vol. 4(3), pages 263-275, October.
  • Handle: RePEc:bla:reviec:v:4:y:1996:i:3:p:263-75
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    References listed on IDEAS

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    1. Robert C. Feenstra & James A. Levinsohn, 1989. "Distance, Demand, and Oligopoly Pricing," NBER Working Papers 3076, National Bureau of Economic Research, Inc.
    2. Wendy L. Hansen & Thomas J. Prusa, 1995. "The Road Most Taken: the Rise of Title VII Protection," The World Economy, Wiley Blackwell, vol. 18(2), pages 295-313, March.
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    4. Silberman, Jonathan I & Durden, Garey C, 1976. "Determining Legislative Preferences on the Minimum Wage: An Economic Approach," Journal of Political Economy, University of Chicago Press, vol. 84(2), pages 317-329, April.
    5. Weingast, Barry R & Moran, Mark J, 1983. "Bureaucratic Discretion or Congressional Control? Regulatory Policymaking by the Federal Trade Commission," Journal of Political Economy, University of Chicago Press, vol. 91(5), pages 765-800, October.
    6. Chappell, Henry W, Jr, 1982. "Campaign Contributions and Congressional Voting: A Simultaneous Probit-Tobit Model," The Review of Economics and Statistics, MIT Press, pages 77-83.
    7. Finger, J M & Hall, H Keith & Nelson, Douglas R, 1982. "The Political Economy of Administered Protection," American Economic Review, American Economic Association, pages 452-466.
    8. Barry Weingast, 1984. "The congressional-bureaucratic system: a principal agent perspective (with applications to the SEC)," Public Choice, Springer, vol. 44(1), pages 147-191, January.
    9. repec:fth:michin:246 is not listed on IDEAS
    10. Robert Baldwin & Jeffrey Steagall, 1994. "An analysis of ITC decisions in antidumping, countervailing duty and safeguard cases," Review of World Economics (Weltwirtschaftliches Archiv), Springer;Institut für Weltwirtschaft (Kiel Institute for the World Economy), pages 290-308.
    11. Gary S. Becker, 1983. "A Theory of Competition Among Pressure Groups for Political Influence," The Quarterly Journal of Economics, Oxford University Press, vol. 98(3), pages 371-400.
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    Cited by:

    1. Grether, Jean-Marie & de Melo, Jaime & Olarreaga, Marcelo, 2001. "Who determines Mexican trade policy?," Journal of Development Economics, Elsevier, pages 343-370.
    2. Zhang, Yijing & Toppinen, Anne & Uusivuori, Jussi, 2014. "Internationalization of the forest products industry: A synthesis of literature and implications for future research," Forest Policy and Economics, Elsevier, vol. 38(C), pages 8-16.
    3. Olarreaga, Marcelo, 1998. "Why are trade agreements more attractive in the presence of foreign direct investment?," WTO Staff Working Papers ERAD-98-03, World Trade Organization (WTO), Economic Research and Statistics Division.
    4. Marcelo Olarreaga, 1998. "Why Are Trade Agreements More Attractive In The Presence Of Foreign Direct Investment?," Swiss Journal of Economics and Statistics (SJES), Swiss Society of Economics and Statistics (SSES), vol. 134(IV), pages 565-583, December.

    More about this item

    JEL classification:

    • F12 - International Economics - - Trade - - - Models of Trade with Imperfect Competition and Scale Economies; Fragmentation
    • F23 - International Economics - - International Factor Movements and International Business - - - Multinational Firms; International Business

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