IDEAS home Printed from https://ideas.repec.org/p/pra/mprapa/22346.html
   My bibliography  Save this paper

Foreign Direct Investment and Customs Union: Incentives for Multilateral Tariff Cooperation over Free Trade

Author

Listed:
  • Yildiz, Halis Murat

Abstract

We examine the implications of a customs union (CU) on the pattern of tariffs, welfare and the prospects for free trade when the nonmember firm has an incentive to engage in foreign direct investment (FDI). First we show that upon the formation of a bilateral CU, the non-member firm has greater incentives to engage in FDI. However, when FDI becomes a feasible entry option for the nonmember firm under a CU, member countries have incentives to strategically induce export over FDI by lowering their joint external tariff. When fixed set-up cost of FDI is sufficiently low, this tariff falls below Kemp-Wan tariff and CU leads to a Pareto improvement relative to no agreement. Moreover, using an infinite repetition of the one-shot tariff game under a CU, we show that FDI incentive of the nonmember firm makes the member countries (nonmember country) more (less) willing to cooperate multilaterally over free trade.

Suggested Citation

  • Yildiz, Halis Murat, 2010. "Foreign Direct Investment and Customs Union: Incentives for Multilateral Tariff Cooperation over Free Trade," MPRA Paper 22346, University Library of Munich, Germany.
  • Handle: RePEc:pra:mprapa:22346
    as

    Download full text from publisher

    File URL: https://mpra.ub.uni-muenchen.de/22346/1/MPRA_paper_22346.pdf
    File Function: original version
    Download Restriction: no

    Other versions of this item:

    References listed on IDEAS

    as
    1. Shabtai Donnenfeld, 2003. "Regional Blocs and Foreign Direct Investment," Review of International Economics, Wiley Blackwell, vol. 11(5), pages 770-788, November.
    2. Bagwell, Kyle & Staiger, Robert W, 1997. "Multilateral Tariff Cooperation during the Formation of Free Trade Areas," International Economic Review, Department of Economics, University of Pennsylvania and Osaka University Institute of Social and Economic Research Association, vol. 38(2), pages 291-319, May.
    3. Eric W. Bond & Raymond G. Riezman & Constantinos Syropoulos, 2013. "A strategic and welfare theoretic analysis of free trade areas," World Scientific Book Chapters,in: International Trade Agreements and Political Economy, chapter 8, pages 101-127 World Scientific Publishing Co. Pte. Ltd..
    4. Bhagwati, Jagdish, 2008. "Termites in the Trading System: How Preferential Agreements Undermine Free Trade," OUP Catalogue, Oxford University Press, number 9780195331653.
    5. Markusen, James R. & Venables, Anthony J., 1998. "Multinational firms and the new trade theory," Journal of International Economics, Elsevier, vol. 46(2), pages 183-203, December.
    6. James R. Markusen, 1995. "The Boundaries of Multinational Enterprises and the Theory of International Trade," Journal of Economic Perspectives, American Economic Association, vol. 9(2), pages 169-189, Spring.
    7. Kathuria, Vinish, 1998. "Foreign Firms and Technology Transfer Knowledge Spillovers to Indian Manufacturing Firms," UNU-INTECH Discussion Paper Series 04, United Nations University - INTECH.
    8. Florence Jaumotte, 2004. "Foreign Direct Investment and Regional Trade Agreements; The Market Size Effect Revisited," IMF Working Papers 04/206, International Monetary Fund.
    9. Horstmann, Ignatius J. & Markusen, James R., 1992. "Endogenous market structures in international trade (natura facit saltum)," Journal of International Economics, Elsevier, vol. 32(1-2), pages 109-129, February.
    10. Kemp, Murray C. & Wan, Henry Jr., 1976. "An elementary proposition concerning the formation of customs unions," Journal of International Economics, Elsevier, vol. 6(1), pages 95-97, February.
    11. Kamal Saggi, 2006. "Preferential Trade Agreements And Multilateral Tariff Cooperation ," International Economic Review, Department of Economics, University of Pennsylvania and Osaka University Institute of Social and Economic Research Association, vol. 47(1), pages 29-57, February.
    Full references (including those not matched with items on IDEAS)

    Citations

    Citations are extracted by the CitEc Project, subscribe to its RSS feed for this item.
    as


    Cited by:

    1. Pritish K. Sahu, 2016. "Malaysia’s Domestic Value Added Export: The Role of Governance and Strategic Policy Reforms," International Journal of Economics and Financial Issues, Econjournals, vol. 6(4), pages 1578-1584.

    More about this item

    Keywords

    Customs Union; Foreign Direct Investment; Multilateral Tariff Cooperation.;

    JEL classification:

    • F13 - International Economics - - Trade - - - Trade Policy; International Trade Organizations
    • F12 - International Economics - - Trade - - - Models of Trade with Imperfect Competition and Scale Economies; Fragmentation

    NEP fields

    This paper has been announced in the following NEP Reports:

    Statistics

    Access and download statistics

    Corrections

    All material on this site has been provided by the respective publishers and authors. You can help correct errors and omissions. When requesting a correction, please mention this item's handle: RePEc:pra:mprapa:22346. 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: (Joachim Winter). General contact details of provider: http://edirc.repec.org/data/vfmunde.html .

    If you have authored this item and are not yet registered with RePEc, we encourage you to do it here. This allows to link your profile to this item. It also allows you to accept potential citations to this item that we are uncertain about.

    If CitEc recognized a reference but did not link an item in RePEc to it, you can help with this form .

    If you know of missing items citing this one, you can help us creating those links by adding the relevant references in the same way as above, for each refering item. If you are a registered author of this item, you may also want to check the "citations" tab in your RePEc Author Service profile, as there may be some citations waiting for confirmation.

    Please note that corrections may take a couple of weeks to filter through the various RePEc services.

    IDEAS is a RePEc service hosted by the Research Division of the Federal Reserve Bank of St. Louis . RePEc uses bibliographic data supplied by the respective publishers.