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Tariff Reforms under Foreign Factor Ownership

Listed author(s):
  • Olarreaga, M.

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.

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Paper provided by Stanford - Institute for Thoretical Economics in its series Papers with number 97-001.

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Length: 21 pages
Date of creation: 1997
Handle: RePEc:fth:stante:97-001
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