Tariff Reforms under Foreign Factor Ownership

Marcelo Olarreaga

Working Papers from Stanford - Institute for Thoretical Economics

Abstract: In the presence of foreign factor ownership, the traditional welfare effects of tariff reforms have to be reconsidered to include income redistribution between national and foreign-owned factors. Bhagwati and Brecher (1980) showed that when the relative amount of foreign-owned factors in the host country is sufficiently large as to induce a change in the direction of the trade pattern, immiserising tariff reductions may occur. Here it is shown that in the mirror case when foreign-owned factors tend to promote the existing trade pattern (i.e. trade-promoting), similar results can be obtained. On the other hand, when foreign factors are trade-substituting, tariff reductions cannot be immiserising. Extending the analysis to the case of trade-diverting Free Trade Areas, it is shown that national welfare may improve if foreign factors are trade-substituting.

Keywords: TRADE; INTERNATIONAL INVESTMENTS; INTERNATIONAL FINANCIAL MARKET (search for similar items in EconPapers)
JEL-codes: F11 F13 F21 (search for similar items in EconPapers)
Pages: 21 pages
Date: 1997
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Persistent link: https://EconPapers.repec.org/RePEc:fth:stante:97-001

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