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RESEARCH AND ANALYSIS:  WORKING PAPERS
Why Are Trade Agreements More Attractive In The Presence Of Foreign Direct Investment? 

This paper argues that interests of nationals and owners of home-based foreign capital in the formation of a Trade Agreements (TA) are not antagonistic, except under rather particular assumptions on initial tariffs among potential members.  

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No: ERAD-98-03  

Author:
Marcelo Olarreaga  
World Trade Organization and CEPR  

Manuscript date:   June 1998  

Abstract Back to top

This paper argues that interests of nationals and owners of home-based foreign capital in the formation of a Trade Agreements (TA) are not antagonistic, except under rather particular assumptions on initial tariffs among potential members. Further, if initial tariffs are endogenously determined through an industry-lobbying process, then TA that would have been immiserising in the absence of Foreign Direct Investment (FDI), may be welfare-enhancing in the presence of foreign-owned firms. The rationale is linked to the effect that the entry of FDI has on the pre-TA tariff, through contributions to the incumbent government. These results may help explain recent integration programs between developed and developing countries. 

Keywords  Back to top

Trade Agreement; Foreign Direct; Political Economy. 

JEL codes: [F12], [F15], [F23] 

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