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The B.E. Journal of Economic Analysis & Policy

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Volume 7, Issue 1 (Nov 2007)


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Volume 1 (2001)

Foreign Direct Investment, Endogenous Tariffs, and Preferential Trade Agreements

Emily J Blanchard
  • 1University of Virginia,
Published Online: 2007-11-05 | DOI: https://doi.org/10.2202/1935-1682.1800


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

About the article

Published Online: 2007-11-05

Citation Information: The B.E. Journal of Economic Analysis & Policy, ISSN (Online) 1935-1682, DOI: https://doi.org/10.2202/1935-1682.1800. Export Citation

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