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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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    Cited by:

    1. Grether, Jean-Marie & de Melo, Jaime & Olarreaga, Marcelo, 2001. "Who determines Mexican trade policy?," Journal of Development Economics, Elsevier, vol. 64(2), pages 343-370, April.
    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. 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.

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