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Optimal tariffs with FDI : the evidence

Author

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  • Bruce A. Blonigen
  • Matthew T. Cole

Abstract

Recent theoretical work suggests that the presence of foreign direct investment (FDI) lowers a country’s noncooperative Nash tariff. To test this hypothesis, we first adapt the theoretical model formulated by Blanchard (2010) to derive an intuitive, empirically testable equation. This equation is an augmentation of the standard formula equal to the inverse of export supply elasticity. Using constructed estimates of export supply elasticities and measures of FDI, we test this hypothesis with respect to tariffs set by China prior to 2001. We focus on China before its accession into the World Trade Organization (WTO) for two primary reasons: first, China is a recipient of FDI during this time; and second, prior to becoming a WTO member China can be seen as a player in a noncooperative game. We find evidence to suggest that before entering the WTO, China chooses lower tariffs, ceteris paribus, for industries that receive more FDI. This is an important result since having a better understanding of how countries act unilaterally will provide insight into the multilateral cooperative outcome; that is trade negotiations.

Suggested Citation

  • Bruce A. Blonigen & Matthew T. Cole, 2011. "Optimal tariffs with FDI : the evidence," Working Papers 201121, School of Economics, University College Dublin.
  • Handle: RePEc:ucn:wpaper:201121
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    File URL: http://hdl.handle.net/10197/3458
    File Function: First version, 2011
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    References listed on IDEAS

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    1. Christian Broda & Joshua Greenfield & David Weinstein, 2006. "From Groundnuts to Globalization: A Structural Estimate of Trade and Growth," NBER Working Papers 12512, National Bureau of Economic Research, Inc.
    2. James R. Markusen, 2004. "Multinational Firms and the Theory of International Trade," MIT Press Books, The MIT Press, edition 1, volume 1, number 0262633078, January.
    3. Grossman, Gene M & Helpman, Elhanan, 1995. "Trade Wars and Trade Talks," Journal of Political Economy, University of Chicago Press, vol. 103(4), pages 675-708, August.
    4. Demidova, Svetlana & Rodríguez-Clare, Andrés, 2009. "Trade policy under firm-level heterogeneity in a small economy," Journal of International Economics, Elsevier, vol. 78(1), pages 100-112, June.
    5. Ellingsen, Tore & Warneryd, Karl, 1999. "Foreign Direct Investment and the Political Economy of Protection," International Economic Review, Department of Economics, University of Pennsylvania and Osaka University Institute of Social and Economic Research Association, vol. 40(2), pages 357-379, May.
    6. Blanchard Emily J, 2007. "Foreign Direct Investment, Endogenous Tariffs, and Preferential Trade Agreements," The B.E. Journal of Economic Analysis & Policy, De Gruyter, vol. 7(1), pages 1-52, November.
    7. Bhagwati, Jagdish N. & Brecher, Richard A. & Dinopoulos, Elias & Srinivasan, T. N., 1987. "Quid pro quo foreign investment and welfare : A political-economy-theoretic model," Journal of Development Economics, Elsevier, vol. 27(1-2), pages 127-138, October.
    8. Phillip McCalman, 2004. "Protection for Sale and Trade Liberalization: an Empirical Investigation," Review of International Economics, Wiley Blackwell, vol. 12(1), pages 81-94, February.
    9. Emily Blanchard & Xenia Matschke, 2015. "U.S. Multinationals and Preferential Market Access," The Review of Economics and Statistics, MIT Press, vol. 97(4), pages 839-854, October.
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    11. Cole, Matthew T. & Davies, Ronald B., 2011. "Strategic tariffs, tariff jumping, and heterogeneous firms," European Economic Review, Elsevier, vol. 55(4), pages 480-496, May.
    12. Blonigen, Bruce A & Figlio, David N, 1998. "Voting for Protection: Does Direct Foreign Investment Influence Legislator Behavior?," American Economic Review, American Economic Association, vol. 88(4), pages 1002-1014, September.
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    Cited by:

    1. Emily Blanchard & Xenia Matschke, 2015. "U.S. Multinationals and Preferential Market Access," The Review of Economics and Statistics, MIT Press, vol. 97(4), pages 839-854, October.

    More about this item

    Keywords

    Foreign direct investment; Optimal tariffs; Investments; Foreign; Tariff; China--Commercial policy;

    JEL classification:

    • F10 - International Economics - - Trade - - - General
    • F13 - International Economics - - Trade - - - Trade Policy; International Trade Organizations
    • F15 - International Economics - - Trade - - - Economic Integration

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