Why are Trade Agreements More Attractive in the Presence of Foreign Direct Investment?

Marcelo Olarreaga ()

Working Papers from Stanford - Institute for Thoretical Economics

Abstract: 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: TRADE AGREEMENTS; INTERNATIONAL INVESTMENTS; COMPETITION (search for similar items in EconPapers)
JEL-codes: F12 F15 F23 (search for similar items in EconPapers)
Date: 1998

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Persistent link: http://EconPapers.repec.org/RePEc:fth:stante:97-003

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