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North-South customs unions and international capital mobility

Author

Listed:
  • Fernandez-Arias, Eduardo
  • Spiegel, Mark M.

Abstract

The primary distinction in a North-South trade accord is likely to be that the Southern nation experiences more capital scarcity than its Northern trade partner. So the trade accord's impact on the Southern trading partner's ability to attract capital may have welfare implications for both nations. The authors extend the traditional analysis of customs unions to allow for international capital movements. Their results indicate that trade accords may affect the ability of Southern nations to attract capital and may divert capital between Southern nations. Moreover, the welfare implications of North-South trade accords may differ from those that predict the North American Free Trade Agreement's (NAFTA) minor third-country effects, holding factor endowments constant. The key implications of North-South trade accords such as NAFTA are generally perceived to involve their impact on investment flows. The authors try to understand the channels through which trade accords can affect North-South investment flows. A potential link between trade accords and investment flows may be how the accords affect the ability of the Southern partner government to make commitments about the treatment of foreign investment. They show that these accords can affect both the magnitude and pattern of inward foreign investment and production, implying the possibility that both trade and financial diversioncan stem from a bilateral regional trade accord. Novel effects that emerge under sovereign risk must be addressed when assessing the welfare implications of trade accords. The greatest gains from integration are still achieved when integration takes place between the countries with the greatest potential gains from trade. But the authors make a distinction: these gains now include both current trade and inter-temporal trade through foreign investment.

Suggested Citation

  • Fernandez-Arias, Eduardo & Spiegel, Mark M., 1996. "North-South customs unions and international capital mobility," Policy Research Working Paper Series 1573, The World Bank.
  • Handle: RePEc:wbk:wbrwps:1573
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    References listed on IDEAS

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    Citations

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    Cited by:

    1. Ayça Tekin-Koru & Andreas Waldkirch, 2010. "North-South Integration and the Location of Foreign Direct Investment," Review of International Economics, Wiley Blackwell, vol. 18(4), pages 696-713, September.
    2. Tekin-Koru, Ayca & Waldkirch, Andreas, 2007. "North American Integration and the Location of Foreign Direct Investment," MPRA Paper 5212, University Library of Munich, Germany.
    3. Waldkirch, Andreas, 2006. "The ‘New Regionalism’: Integration as a Commitment Device for Developing Countries," Journal of Economic Integration, Center for Economic Integration, Sejong University, vol. 21, pages 397-425.
    4. Dieter M. Urban, 2006. "Multilateral Investment Agreement in a Political Equilibrium," CESifo Working Paper Series 1830, CESifo Group Munich.
    5. Goohoon Kwon & Raphael A Espinoza, 2009. "Regional Financial Integration in the Caribbean; Evidence From Financial and Macroeconomic Data," IMF Working Papers 09/139, International Monetary Fund.
    6. Popa, Ana & Oprunenco, Alex & Lücke, Matthias & Tekce, Mahmut & Eugen, Hristev & Mincu, Georgeta & Vasilescu, Victoria & Prohnitchi, Valeriu, 2009. "A free trade area between the Repbulic of Moldova and the European Union: feasibility, perspectives and potential impact," Open Access Publications from Kiel Institute for the World Economy 28899, Kiel Institute for the World Economy (IfW).

    More about this item

    Keywords

    Environmental Economics&Policies; Economic Theory&Research; Payment Systems&Infrastructure; International Terrorism&Counterterrorism; Fiscal&Monetary Policy; Trade and Services; Economic Theory&Research; Environmental Economics&Policies; TF054105-DONOR FUNDED OPERATION ADMINISTRATION FEE INCOME AND EXPENSE ACCOUNT; Trade and Regional Integration;

    JEL classification:

    • O16 - Economic Development, Innovation, Technological Change, and Growth - - Economic Development - - - Financial Markets; Saving and Capital Investment; Corporate Finance and Governance
    • F15 - International Economics - - Trade - - - Economic Integration
    • F21 - International Economics - - International Factor Movements and International Business - - - International Investment; Long-Term Capital Movements

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