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

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  • Fathali Firoozi

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)

Suggested Citation

  • Fathali Firoozi, 1998. "On the Second-Best Foreign Investment Policy and Pattern of Commodity Trade," The American Economist, Sage Publications, vol. 42(1), pages 34-41, March.
    • Handle: RePEc:sae:amerec:v:42:y:1998:i:1:p:34-41
    DOI: 10.1177/056943459804200103
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    References listed on IDEAS

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    More about this item

    JEL classification:

    • F21 - International Economics - - International Factor Movements and International Business - - - International Investment; Long-Term Capital Movements
    • F15 - International Economics - - Trade - - - Economic Integration

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