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Why are Trade Agreements More Attractive in the Presence of Foreign Direct Investment?

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  • Olarreaga, M.

Abstract

This paper argues that interests of nationals and owners of home-based foreign capital in the formation of a Trade Agreements (TA) are not antagonistic, except under rather particular assumptions on initial tariffs among potential members. Further, if initial tariffs are endogenously determined through an industry-lobbying process, then TA that would have been immiserising in the absence of Foreign Direct Investment (FDI), may be welfare-enhancing in the presence of foreign-owned firms. The rationale is linked to the effect that the entry of FDI has on the pre-TA tariff, through contributions to the incumbent government. These results may help explain recent integration programs between developed and developing countries.

Suggested Citation

  • Olarreaga, M., 1998. "Why are Trade Agreements More Attractive in the Presence of Foreign Direct Investment?," Papers 97-003, Stanford - Institute for Thoretical Economics.
    • Handle: RePEc:fth:stante:97-003
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    JEL classification:

    • F12 - International Economics - - Trade - - - Models of Trade with Imperfect Competition and Scale Economies; Fragmentation
    • F15 - International Economics - - Trade - - - Economic Integration
    • F23 - International Economics - - International Factor Movements and International Business - - - Multinational Firms; International Business

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