Emily J. Blanchard

Foreign Direct Investment, Endogenous Tariffs, and Preferential Trade Agreements

This paper examines the complementarity between international trade and investment policies, and argues that preferential trade agreements may be a particularly effective means for harnessing the tariff liberalizing potential of foreign direct investment. A simple two country model demonstrates that export-platform foreign investment induces unilateral tariff liberalization by the investment-source country, suggesting that international capital mobility may substitute partially for multilateral forums such as the WTO in achieving efficient tariffs. A multi-country extension of the model in which countries can compete for foreign investors via subsidies then develops an efficiency argument in favor of discriminatory tariff allowances such as Article XXIV of the GATT or the Generalized System of Preferences. When small countries can earn preferential tariff treatment from a large trading counterpart by encouraging local export-platform investment (or by discouraging import competing investment), the equilibrium tariff level will be lower when discriminatory tariffs are possible rather than when they are not.

Reevaluating the Role of Trade Agreements: Does Investment Globalization Make the WTO Obsolete?

International ownership alters the role of multilateral trade institutions by redefining pecuniary externalities among countries. Regardless of the underlying cause - whether foreign direct investment, international portfolio diversification, cross-country mergers, or multinational firms -- international ownership can mitigate incentives that lead large countries to set inefficiently high tariffs. At the same time, however, foreign ownership introduces the potential for expropriation by investment-host countries, which can extract rent from foreign owners by manipulating local prices. The basic principle of reciprocity continues to serve as an important guide to efficiency, though its application must account for the pattern of international ownership in addition to traditional measures of market access.

Trade taxes and international investment

This paper demonstrates that international investment disturbs the conventionally understood equivalence between import tariffs and export taxes. Fundamentally, remittances to foreigners introduce an additional pecuniary channel between countries so that two-good Lerner Symmetry generally will not hold. Moreover, because tariffs subsidize investors in the local import competing sector while export taxes can extract rent from foreign investors in the export sector, the pattern of international investment will influence government preferences over trade policy instruments as well as levels. Notably, trade tax symmetry is restored by introducing a third policy tool in the form of a direct a tax on international remittances.

A Shifting Mandate: International Ownership, Global Fragmentation, and a Case for Deeper Integration under the WTO

This paper reviews several key implications of international investment and global supply chain fragmentation for the multilateral trading system. Based on existing economic research, I identify a two-fold challenge for policy makers: first, to leverage the trade-liberalizing potential of global fragmentation at the multilateral level; and second, to counter the potential for opportunistic manipulation of behind-the-border policy instruments.

Private Labels and International Trade: Trading Variety for Volume

This paper explores the role of pooled-producer, e.g. private label, trade intermediation in shaping the range and diversity of exports. Direct sales maintain a firm’s unique product characteristics (‘brand equity’), whereas trade through an intermediary can take two forms - either a wholesaling arrangement that (also) maintains the exporter’s unique brand but imposes a higher marginal cost (via double marginalization), or a ‘private label’ contract under which the firm’s product is pooled with other firms’ output and re-sold under a new private label brand created by the intermediary. This paper focuses on the latter, and shows that the availability of the private label option results in greater total export volumes and lower average prices for consumers, but fewer independent varieties available in equilibrium. Welfare implications are mixed: consumers trade variety for volume, firms face greater competition from the new pooled-products, and intermediaries capture much of the gains from trade.

Trade Imbalances, International Investment, and a Limitation of Lerner's Symmetry Theorem

This paper sounds a caution to international trade economists, demonstrating that the equilibrium trade imbalances implied by most models of international investment disturb the symmetry between import tariffs and export taxes found by Lerner (1936). When trade is unbalanced, Lerners equivalence result holds only when (i) trade tax revenue is redistributed among consumers, (ii) neither the import tariff nor the export tax would be prohibitive, and (iii) the value of trade imbalance at world prices is invariant to instrument choice. The last condition implies that Lerner symmetry generally will not obtain in many otherwise standard trade models with international investment, since remittances to foreign investors - a source of permanent trade imbalances- typically depend on both relative and absolute local prices, and thus on the governments choice of trade tax instrument. Endogenizing trade policy only exacerbates the asymmetry, since international investment influences government preferences over trade policy instruments as well as levels. Notably, Lerner symmetry can be resurrected by introducing a third policy tool in the form of a direct a tax on international investment returns. Future work therefore should either reinstate Lerner symmetry by adopting investment taxes, or at very the least, acknowledge the trade tax asymmetry inherent to models with international investment.