Customs Unions And Foreign Investment: Theory And Evidence From Mercosur’s Auto Industry
This paper demonstrates how regional trade agreements (RTAs) can lead to both foreign direct investment expansion and relocation effects. These two effects, in return, impact the endogenous formation of RTAs. The investment expansion effect results from foreign firms’ ability to serve a larger market from a single facility. The relocation effect occurs due to the firms’ desire to move their initial plants from high-cost member countries to low-cost ones. The relocation effect can overwhelm the expansion effect for the high-cost members and lead to the collapse of socially efficient RTAs. The auto industry in Mercosur is a great example to study these phenomena. Argentina was worried that low-cost Brazil would attract all of the foreign investment and dominate both markets. To convince Argentina to agree to free trade in automobiles (and to Mercosur), the auto sectoral agreement included the Compensated Trade Clause (CTC) which requires each firm to balance its trade between these countries. This mitigates the relocation problem by forcing firms to produce some models in Argentina and entices the governments to sign the RTA..
|Date of creation:||Dec 2004|
|Date of revision:|
|Contact details of provider:|| Postal: Casilla No967, Santiago|
Phone: (562) 670 2000
Fax: (562) 698 4847
Web page: http://www.bcentral.cl/
More information through EDIRC
Please report citation or reference errors to , or , if you are the registered author of the cited work, log in to your RePEc Author Service profile, click on "citations" and make appropriate adjustments.:
- Grossman, Gene M & Helpman, Elhanan, 1994.
"Protection for Sale,"
American Economic Review,
American Economic Association, vol. 84(4), pages 833-50, September.
- Gene M. Grossman & Elhanan Helpman, 1992. "Protection For Sale," NBER Working Papers 4149, National Bureau of Economic Research, Inc.
- Grossman, Gene & Helpman, Elhanan, 1993. "Protection for Sale," CEPR Discussion Papers 827, C.E.P.R. Discussion Papers.
- Grossman, G.M. & Helpman, E., 1992. "Protection for Sale," Papers 162, Princeton, Woodrow Wilson School - Public and International Affairs.
- Grossman, G.M. & Helpman, E., 1992. "Protection for Sale," Papers 21-92, Tel Aviv.
- Olarreaga, Marcelo & Soloaga, Isidro, 1998.
"Endogenous Tariff Formation: The Case of Mercosur,"
World Bank Economic Review,
World Bank Group, vol. 12(2), pages 297-320, May.
- Bhagwati, Jagdish N. & Brecher, Richard A. & Dinopoulos, Elias & Srinivasan, T. N., 1987. "Quid pro quo foreign investment and welfare : A political-economy-theoretic model," Journal of Development Economics, Elsevier, vol. 27(1-2), pages 127-138, October.
When requesting a correction, please mention this item's handle: RePEc:chb:bcchwp:282. See general information about how to correct material in RePEc.
For technical questions regarding this item, or to correct its authors, title, abstract, bibliographic or download information, contact: (Claudio Sepulveda)
If references are entirely missing, you can add them using this form.