Tariff Reductions in the Presence of Foreign Direct Investment

Marcelo Olarreaga

Review of International Economics, 1996, vol. 4, issue 3, 263-75

Abstract: This paper argues that the welfare effects of trade liberalization in the presence of foreign direct investment obtained under perfect competition cannot be extended to imperfectly competitive markets. In the Heckscher-Ohlin model, trade liberalization may be paradoxically immiserizing when the traditional welfare-increasing result is corrected for the change in foreign capital revenue. Under imperfect competition this cannon occur, except under rather implausible assumptions. Indeed, a tariff reduction is expected to increase welfare when the welfare indicator is corrected for the presence of foreign capital, regardless of the type of market structure and the form of competitive rivalry. Copyright 1996 by Blackwell Publishing Ltd.

Date: 1996
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