The B.E. Journal of Economic Analysis & Policy
Editor-in-Chief: Jürges, Hendrik / Ludwig, Sandra
Ed. by Auriol , Emmanuelle / Brunner, Johann / Fleck, Robert / Mendola, Mariapia / Requate, Till / Zulehner, Christine / Schirle, Tammy
IMPACT FACTOR 2015: 0.250
5-year IMPACT FACTOR: 0.825
SCImago Journal Rank (SJR) 2015: 0.501
Source Normalized Impact per Paper (SNIP) 2015: 0.418
Impact per Publication (IPP) 2015: 0.455
Foreign Direct Investment, Endogenous Tariffs, and Preferential Trade Agreements
1University of Virginia, (email)
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
- Published Online:
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.
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