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Why Are Trade Agreements More Attractive In The Presence Of Foreign Direct Investment?

  • Marcelo Olarreaga

This paper argues that interests of nationals (i.e., domestic residents) and owners of home-based foreign capital in the formation of a Trade Agreements (TA) are not antagonistic, except under rather particular assumptions on initial tariffs among potential members. Further, if initial tariffs are endogenously determined through an industrylobbying process, then TA that would have been immiserising in the absence of Foreign Direct Investment (FDI), may be welfare-enhancing in the presence of foreign-owned firms. The rationale is linked to the effect that the entry of FDI has on the pre-TA tariff, through contributions to the incumbent government. These results may help explain recent integration programs between developed and developing countries.

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Article provided by Swiss Society of Economics and Statistics (SSES) in its journal Swiss Journal of Economics and Statistics.

Volume (Year): 134 (1998)
Issue (Month): IV (December)
Pages: 565-583

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Handle: RePEc:ses:arsjes:1998-iv-5
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  1. Olarreaga, M., 1995. "Tariff Reductions in the Presence of Foreign Direct Investment," Research Papers by the Institute of Economics and Econometrics, Geneva School of Economics and Management, University of Geneva 95.11, Institut d'Economie et Econométrie, Université de Genève.
  2. Grossman, G.M. & Helpman, E., 1992. "Protection for Sale," Papers 21-92, Tel Aviv.
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  12. Richard E. Baldwin & Rikard Forslid & Jan I. Haaland, 1996. "Investment Creation and Diversion in Europe," The World Economy, Wiley Blackwell, vol. 19(6), pages 635-659, November.
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  14. Massimo Motta & George Norman, 1993. "Does economic integration cause foreign direct investment?," Economics Working Papers 28, Department of Economics and Business, Universitat Pompeu Fabra.
  15. Bernheim, B Douglas & Whinston, Michael D, 1986. "Menu Auctions, Resource Allocation, and Economic Influence," The Quarterly Journal of Economics, MIT Press, vol. 101(1), pages 1-31, February.
  16. Harris, R., 1994. "Customs Union Theory in oligopoly," Discussion Papers dp94-09, Department of Economics, Simon Fraser University.
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