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Tariff Reforms under Foreign Factor Ownership

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  • Olarreaga, M.

Abstract

In the presence of foreign factor ownership, the traditional welfare effects of tariff reforms have to be reconsidered to include income redistribution between national and foreign-owned factors. Bhagwati and Brecher (1980) showed that when the relative amount of foreign-owned factors in the host country is sufficiently large as to induce a change in the direction of the trade pattern, immiserising tariff reductions may occur. Here it is shown that in the mirror case when foreign-owned factors tend to promote the existing trade pattern (i.e. trade-promoting), similar results can be obtained. On the other hand, when foreign factors are trade-substituting, tariff reductions cannot be immiserising. Extending the analysis to the case of trade-diverting Free Trade Areas, it is shown that national welfare may improve if foreign factors are trade-substituting.

Suggested Citation

  • Olarreaga, M., 1997. "Tariff Reforms under Foreign Factor Ownership," Papers 97-001, Stanford - Institute for Thoretical Economics.
  • Handle: RePEc:fth:stante:97-001
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    Keywords

    TRADE ; INTERNATIONAL INVESTMENTS ; INTERNATIONAL FINANCIAL MARKET;

    JEL classification:

    • F11 - International Economics - - Trade - - - Neoclassical Models of Trade
    • F13 - International Economics - - Trade - - - Trade Policy; International Trade Organizations
    • F21 - International Economics - - International Factor Movements and International Business - - - International Investment; Long-Term Capital Movements

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