On the Second-Best Foreign Investment Policy and Pattern of Commodity Trade

Fathali Firoozi

The American Economist, 1998, vol. 42, issue 1, 34-41

Abstract: An agreement on free commodity trade often does not preclude countries from protecting their national interests through restrictive policies toward cross-border movements of production factors (e.g., capital and labor). A number of studies have suggested second-best international capital flows (welfare maximizing under free commodity trade) that officials of a country must encourage via various policy measures. However, an emerging literature indicates that policy toward foreign direct investment is being increasingly utilized as a new form of protectionism under free trade. Utilizing a generalized Heckscher-Ohlin model, this study characterizes the necessary adjustments to the suggested second-best foreign investment policies of a country when there is an extraneous protectionist objective regarding the pattern of trade in a commodity. An implication is that until all production factors can freely move internationally without policy impediments of a participating country, unrestricted commodity trade alone cannot achieve its full potential in removing protectionism and setting comparative advantage as the basis for trade. (JEL F21, F15)

Date: 1998
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Persistent link: https://EconPapers.repec.org/RePEc:sae:amerec:v:42:y:1998:i:1:p:34-41

DOI: 10.1177/056943459804200103

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