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WTO Working Papers

WTO working papers usually represent research in progress. Such research may be conducted in the preparation of WTO Secretariat reports, studies or other material for WTO members. The papers are circulated for comment because the WTO considers critical review of professional research to be extremely important.

English

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. 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.

English

Keywords: Political Economy, Trade Agreement, Foreign Direct Investment, Imperfect Competition
JEL: F12: International Economics / Trade / Models of Trade with Imperfect Competition and Scale Economies; Fragmentation; F23: International Economics / International Factor Movements and International Business / Multinational Firms; International Business; F15: International Economics / Trade / Economic Integration
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