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

39 Pages Posted: 13 Jun 2006

See all articles by Emily J. Blanchard

Emily J. Blanchard

Dartmouth College - Tuck School of Business

Date Written: May 2006

Abstract

This paper demonstrates that international ownership can mitigate the terms of trade externalities that lead large countries to set inefficiently high tariffs, and may thereby substitute for negotiated tariff liberalization in eliminating the strategic manipulation of world prices. The policy prediction is unclear, however, since international cross-ownership also introduces an internal cost-shifting externality that can drive investment-host countries to expand local market access beyond efficient levels in an effort to extract rents from foreign investors. An immediate implication is that simply making large countries "act small" or completely diversify their global investment portfolios to neutralize traditionally understood terms of trade cost-shifting motives cannot ensure efficient trade policy regimes in an environment with international investment. At the same time, a modified version of the principle of reciprocity does continue to serve as an important guide to efficiency by balancing countries' external and internal pecuniary externalities.

JEL Classification: F01, F13, F15, F21

Suggested Citation

Blanchard, Emily J., Reevaluating the Role of Trade Agreements: Does Investment Globalization Make the WTO Obsolete? (May 2006). CESifo Working Paper Series No. 1735, Available at SSRN: https://ssrn.com/abstract=908511 or http://dx.doi.org/10.2139/ssrn.908511

Emily J. Blanchard (Contact Author)

Dartmouth College - Tuck School of Business ( email )

Hanover, NH 03755
United States

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