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Foreign-owned Capital and Endogenous Tariffs

Author

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  • Olarreaga, Marcelo

    (The World Bank)

Abstract

During the last two decades we simultaneously observed an important increase in investment abroad and a rush towards free-trade worldwide. This paper argues that the former may (partially) help explain the latter. In a model of endogenous determination of trade protection through lobbying, where the government is also concerned by income redistribution among owners of foreign and national factors of production, entry of foreign capital into the host country will most likely reduce the endogenous level of protection. If the elastic - ity of substitution between labour and capital is sufficiently small, we show that protection cannot increase after the entry of foreign capital, regardless of the form of investment abroad (acquisition of existing domestic firms, or entry by foreign firms) or its trade orientation (whether foreign capital enters the export- or import-competing sector).

Suggested Citation

  • Olarreaga, Marcelo, 1999. "Foreign-owned Capital and Endogenous Tariffs," Journal of Economic Integration, Center for Economic Integration, Sejong University, vol. 14, pages 606-624.
    • Handle: RePEc:ris:integr:0119
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    References listed on IDEAS

    as
    1. Schweinberger, Albert G & Vosgerau, Hans J, 1997. "Foreign Factor Ownership and Optimal Tariffs," Review of International Economics, Wiley Blackwell, vol. 5(1), pages 1-19, February.
    2. Robert C. Feenstra & Gene M. Grossman & Douglas A. Irwin (ed.), 1996. "The Political Economy of Trade Policy: Papers in Honor of Jagdish Bhagwati," MIT Press Books, The MIT Press, edition 1, volume 1, number 0262061864, December.
    3. Grossman, Gene M & Helpman, Elhanan, 1994. "Protection for Sale," American Economic Review, American Economic Association, vol. 84(4), pages 833-850, September.
    4. Helpman, Elhanan, 1995. "Politics and Trade Policy," Foerder Institute for Economic Research Working Papers 275606, Tel-Aviv University > Foerder Institute for Economic Research.
    5. Ellingsen, Tore & Warneryd, Karl, 1999. "Foreign Direct Investment and the Political Economy of Protection," International Economic Review, Department of Economics, University of Pennsylvania and Osaka University Institute of Social and Economic Research Association, vol. 40(2), pages 357-379, May.
    6. Grether, Jean-Marie & de Melo, Jaime & Olarreaga, Marcelo, 2001. "Who determines Mexican trade policy?," Journal of Development Economics, Elsevier, vol. 64(2), pages 343-370, April.
    7. Ignatius J. Horstmann & James R. Markusen, 2021. "Endogenous market structures in international trade (natura facit saltum)," World Scientific Book Chapters, in: BROADENING TRADE THEORY Incorporating Market Realities into Traditional Models, chapter 2, pages 25-45, World Scientific Publishing Co. Pte. Ltd..
    8. Marcelo Olarreaga, 1998. "Tariff Reductions under Foreign Factor Ownership," Canadian Journal of Economics, Canadian Economics Association, vol. 31(4), pages 830-836, November.
    9. Hillman, Arye L, 1982. "Declining Industries and Political-Support Protectionist Motives," American Economic Review, American Economic Association, vol. 72(5), pages 1180-1187, December.
    10. Hideo Konishi & Kamal Saggi & Shlomo Weber, 2023. "Endogenous trade policy under foreign direct investment," World Scientific Book Chapters, in: Kamal Saggi (ed.), Technology Transfer, Foreign Direct Investment, and the Protection of Intellectual Property in the Global Economy, chapter 23, pages 523-542, World Scientific Publishing Co. Pte. Ltd..
    11. Hillman, Arye L & Ursprung, Heinrich W, 1993. "Multinational Firms, Political Competition, and International Trade Policy," International Economic Review, Department of Economics, University of Pennsylvania and Osaka University Institute of Social and Economic Research Association, vol. 34(2), pages 347-363, May.
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    Cited by:

    1. Louis Jaeck & Sehjeong Kim, 2018. "FDI Deregulation Versus Labor Market Reform: a Political Economy Approach," Atlantic Economic Journal, Springer;International Atlantic Economic Society, vol. 46(1), pages 73-89, March.
    2. Blanchard, Emily J., 2010. "Reevaluating the role of trade agreements: Does investment globalization make the WTO obsolete?," Journal of International Economics, Elsevier, vol. 82(1), pages 63-72, September.
    3. Fon, Roger Mongong & Filippaios, Fragkiskos & Stoian, Carmen & Lee, Soo Hee, 2021. "Does foreign direct investment promote institutional development in Africa?," International Business Review, Elsevier, vol. 30(4).
    4. Andreas Polk, 2002. "Lobbying Activities of Multinational Firms," SOI - Working Papers 0205, Socioeconomic Institute - University of Zurich, revised Jun 2002.
    5. Wang, Jue-Shyan & Koo, Hui-wen & Chen, Tain-Jy, 2006. "Resource rivalry and endogenous lobby," Japan and the World Economy, Elsevier, vol. 18(4), pages 488-511, December.

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    More about this item

    Keywords

    endogenous trade policy; foreign-owned firms;

    JEL classification:

    • F13 - International Economics - - Trade - - - Trade Policy; International Trade Organizations
    • F21 - International Economics - - International Factor Movements and International Business - - - International Investment; Long-Term Capital Movements

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