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.
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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