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Reevaluating the Role of Trade Agreements: Does Investment Globalization Make the WTO Obsolete?

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  • Emily Blanchard

Abstract

This paper demonstrates that international ownership can mitigate the terms of trade externalities that lead large countries to set inefficiently high tariffs, and may thereby substitute for negotiated tariff liberalization in eliminating the strategic manipulation of world prices. The policy prediction is unclear, however, since international cross-ownership also introduces an internal cost-shifting externality that can drive investment-host countries to expand local market access beyond efficient levels in an effort to extract rents from foreign investors. An immediate implication is that simply making large countries “act small” or completely diversify their global investment portfolios to neutralize traditionally understood terms of trade cost-shifting motives cannot ensure efficient trade policy regimes in an environment with international investment. At the same time, a modified version of the principle of reciprocity does continue to serve as an important guide to efficiency by balancing countries' external and internal pecuniary externalities.

Suggested Citation

  • Emily Blanchard, 2006. "Reevaluating the Role of Trade Agreements: Does Investment Globalization Make the WTO Obsolete?," CESifo Working Paper Series 1735, CESifo Group Munich.
  • Handle: RePEc:ces:ceswps:_1735
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    Cited by:

    1. Kyle Bagwell & Chad P. Bown & Robert W. Staiger, 2016. "Is the WTO Passé?," Journal of Economic Literature, American Economic Association, vol. 54(4), pages 1125-1231, December.
    2. Blanchard, Emily J., 2015. "A Shifting Mandate: International Ownership, Global Fragmentation, and a Case for Deeper Integration under the WTO," World Trade Review, Cambridge University Press, vol. 14(01), pages 87-99, January.
    3. Bernard Hoekman, 2008. "The General Agreement on Trade in Services: Doomed to Fail? Does it Matter?," Journal of Industry, Competition and Trade, Springer, vol. 8(3), pages 295-318, December.
    4. Cole, Matthew T. & Davies, Ronald B., 2011. "Strategic tariffs, tariff jumping, and heterogeneous firms," European Economic Review, Elsevier, vol. 55(4), pages 480-496, May.
    5. Matthew T. Cole & Ronald B. Davies, 2009. "Optimal tariffs, tariff jumping, and heterogeneous firms," Working Papers 200919, School of Economics, University College Dublin.
    6. Matteo Fiorini & Mathilde Lebrand, 2016. "The Political Economy of Services Trade Agreements," CESifo Working Paper Series 5927, CESifo Group Munich.
    7. Adams, Laurel & Régibeau, Pierre & Rockett, Katharine, 2014. "Incentives to create jobs: Regional subsidies, national trade policy and foreign direct investment," Journal of Public Economics, Elsevier, vol. 111(C), pages 102-119.
    8. Kyle Bagwell & Robert W. Staiger, 2016. "The Design of Trade Agreements," NBER Working Papers 22087, National Bureau of Economic Research, Inc.
    9. Emily Blanchard & Xenia Matschke, 2015. "U.S. Multinationals and Preferential Market Access," The Review of Economics and Statistics, MIT Press, vol. 97(4), pages 839-854, October.
    10. Bown,Chad P., 2015. "What?s left for the WTO ?," Policy Research Working Paper Series 7502, The World Bank.
    11. James Lake & Maia Linask, 2016. "Domestic political competition and pro-cyclical import protection," Review of International Economics, Wiley Blackwell, vol. 24(3), pages 564-591, August.
    12. Osnago,Alberto & Rocha,Nadia & Ruta,Michele, 2015. "Deep trade agreements and vertical FDI : the devil is in the details," Policy Research Working Paper Series 7464, The World Bank.
    13. Chad P. Bown, 2011. "Taking Stock of Antidumping, Safeguards and Countervailing Duties, 1990–2009," The World Economy, Wiley Blackwell, vol. 34(12), pages 1955-1998, December.
    14. Pascalis Raimondos-Møller & Alan D. Woodland, 2011. "Reciprocity, World Prices and Welfare," CESifo Working Paper Series 3607, CESifo Group Munich.
    15. Blanchard, Emily J., 2014. "What global fragmentation means for the WTO: Article XXIV, behind-the-border concessions, and a new case for WTO limits on investment incentives," WTO Staff Working Papers ERSD-2014-03, World Trade Organization (WTO), Economic Research and Statistics Division.
    16. David R. DeRemer, 2016. "The Principle of Reciprocity in the 21st Century," IEHAS Discussion Papers 1613, Institute of Economics, Centre for Economic and Regional Studies, Hungarian Academy of Sciences.

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