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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.

Suggested Citation

  • 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.
  • Handle: RePEc:ses:arsjes:1998-iv-5

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    1. 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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    13. 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.
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    JEL classification:

    • F12 - International Economics - - Trade - - - Models of Trade with Imperfect Competition and Scale Economies; Fragmentation
    • F15 - International Economics - - Trade - - - Economic Integration
    • F23 - International Economics - - International Factor Movements and International Business - - - Multinational Firms; International Business


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