| Foreign-owned Capital and Endogenous Tariffs |
Marcelo Olarreaga |
| The World Bank |
| Copyright ©1999 Journal of Economic Integration |
| ABSTRACT |
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During the last two decades we simultaneously observed an import an t 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 elasticity 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 oreign firms) or its trade orientation (whether foreign capital enters the export- or import-competing sector). (JEL-Classifications: F13, F21) |
| Keywords:
endogenous trade policy | foreign-owned firms
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