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The B.E. Journal of Economic Analysis & Policy

Editor-in-Chief: Jürges, Hendrik / Ludwig, Sandra

Ed. by Auriol , Emmanuelle / Brunner, Johann / Fleck, Robert / Friebel, Guido / Mendola, Mariapia / Requate, Till / Tsui, Kevin / Wichardt, Philipp / Zulehner, Christine

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Foreign Direct Investment, Endogenous Tariffs, and Preferential Trade Agreements

Emily J Blanchard1

1University of Virginia,

Citation Information: The B.E. Journal of Economic Analysis & Policy. Volume 7, Issue 1, ISSN (Online) 1935-1682, DOI: 10.2202/1935-1682.1800, November 2007

Publication History

Published Online:
2007-11-05

Abstract

This paper examines the complementarity between international trade and investment policies, and argues that preferential trade agreements may be a particularly effective means for harnessing the tariff liberalizing potential of foreign direct investment. A simple two country model demonstrates that export-platform foreign investment induces unilateral tariff liberalization by the investment-source country, suggesting that international capital mobility may substitute partially for multilateral forums such as the WTO in achieving efficient tariffs. A multi-country extension of the model in which countries can compete for foreign investors via subsidies then develops an efficiency argument in favor of discriminatory tariff allowances such as Article XXIV of the GATT or the Generalized System of Preferences. When small countries can earn preferential tariff treatment from a large trading counterpart by encouraging local export-platform investment (or by discouraging import competing investment), the equilibrium tariff level will be lower when discriminatory tariffs are possible rather than when they are not.

Keywords: FDI; MFN; preferential trade agreements; optimal tariffs

Citing Articles

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[1]
Pierre-Louis Vézina
Review of International Economics, 2014, Volume 22, Number 3, Page 444
[2]
Paola Cardamone and Margherita Scoppola
The Journal of International Trade & Economic Development, 2015, Volume 24, Number 1, Page 1
[3]
Halis M. Yildiz
The Journal of International Trade & Economic Development, 2013, Volume 22, Number 2, Page 298
[4]
Nathaniel P.S. Cook and John Douglas Wilson
Economics Letters, 2013, Volume 119, Number 1, Page 45
[5]
Masahiro Endoh
The Journal of International Trade & Economic Development, 2012, Volume 21, Number 4, Page 493
[6]
Matthew T. Cole and Ronald B. Davies
European Economic Review, 2011, Volume 55, Number 4, Page 480

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