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GTAP Resource #3132

"Does Foreign Investment Shape Trade Policies? A CGE Assessment of the Doha Stalemate"
by Laborde, David and Csilla Lakatos

The paper is built around the hypothesis that the foreign capital owner in its role of a stakeholder in trade policy formulation may limit the incentive of domestic capital owners in their support of protectionist trade policies. More explicitly, we investigate two channels through which foreign investment influences trade policies. First, depending on the share of capital stock owned by foreign investors, the incentive of government to provide protection is reduced as a part of the rents will shift abroad. Second, we consider the fact that firms associated with FDI flows (i.e. multinational companies) are more integrated in the world economy in both their input and output markets than other firms. Therefore, investors will fight any rise of protectionism at the global level.
The present paper is aimed at looking at the political economy implications of the costs of a non-Doha scenario as defined by Bouët and Laborde, 2009. The trade policy scenario we focus on, considers both rise in MFN protection and the end of unilateral preferential schemes.
An extended version of the dynamic MIRAGE model with explicit FDI
modeling is used. International capital allocation decisions are made by the capital owner (domestic or foreign) based solely on the rate of return to their investment. The share of foreign ownership of the total capital stock captures the first channel through which foreign investment influences trade policy.
We introduce an asymmetry between foreign-owned and domestic firms in terms of trade openness. More explicitly, on the input side we assume that foreign owned companies benefit from lower international trade costs (transaction costs) and thus relative prices between world and domestic prices faced by domestic and foreign companies are different. At the same time it is assumed that trade costs decrease with the share of foreign ownership at a bilateral level.

Resource Details (Export Citation) GTAP Keywords
Category: 2009 Conference Paper
Status: Published
By/In: Presented at the 12th Annual Conference on Global Economic Analysis, Santiago, Chile
Date: 2009
Version: Draft
Created: Laborde, D. (4/15/2009)
Updated: Lakatos, C. (4/16/2009)
Visits: 2,872
- Preferential trading arrangements
- Foreign direct investment
- Dynamic modeling

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