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Can import tariffs deter outward FDI?

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  • COLLIE, David R.
  • VANDENBUSSCHE, Hylke

Abstract

In this paper we analyze a country's optimal trade policy when its labor market is unionized and firms are footloose. We show that an important objective for governments to use import protection is to prevent their domestic multinationals to go to a non-unionized location abroad and to serve their country from a distance. A domestic government will set a positive tariff to dissuade its multinational from engaging in outward FDI when the additional profits it repatriates, do not compensate for the loss of domestic union rent. To put it differently, we show that when the domestic labor market is unionized, trade liberalisation between countries with similar wage levels is likely to result in domestic welfare losses as a result of outward FDI. Only when wage differences between countries are large enough, can outward FDI improve domestic welfare and optimal tariffs will be zero. Copyright Springer Science + Business Media, Inc. 2005
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Suggested Citation

  • COLLIE, David R. & VANDENBUSSCHE, Hylke, 2005. "Can import tariffs deter outward FDI?," LIDAM Reprints CORE 1907, Université catholique de Louvain, Center for Operations Research and Econometrics (CORE).
  • Handle: RePEc:cor:louvrp:1907
    DOI: 10.1007/s11079-005-4741-5
    Note: In : Open Economies Review, 16, 341-362, 2005
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    File URL: http://dx.doi.org/10.1007/s11079-005-4741-5
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    References listed on IDEAS

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    1. Aitken, Brian & Harrison, Ann & Lipsey, Robert E., 1996. "Wages and foreign ownership A comparative study of Mexico, Venezuela, and the United States," Journal of International Economics, Elsevier, vol. 40(3-4), pages 345-371, May.
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    Cited by:

    1. Mengheng Liu & Xingwang Qian, 2021. "Provincial Interdependence and China’s “Irrational” Outward Foreign Direct Investment," Open Economies Review, Springer, vol. 32(1), pages 153-181, February.
    2. Arijit Mukherjee & Kullapat Suetrong, 2012. "Unionisation Structure and Outward Foreign Direct Investment," Journal of Institutional and Theoretical Economics (JITE), Mohr Siebeck, Tübingen, vol. 168(2), pages 266-279, June.
    3. Domenico Buccella, 2011. "Labor unions and economic integration: A review," IIE Journal, IIE Journal, Universidad Nacional de La Plata, vol. 0, pages 25-89, January-D.

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