Preferential Trade Agreements

This paper examines how free-trade agreements and customs unions affect the location of foreign direct investment (FDI) and social welfare, taking into account that governments may adjust taxes and external tariffs to compete for FDI. Conditions are identified under which a free-trade agreement leads to FDI and under which this improves welfare. The welfare effect is shown to depend on the relative size of efficiency gains in production and government revenue losses due to tax competition. A free-trade agreement may fail to induce welfare-improving FDI, creating a role for a customs union. JEL Classification: H25, F13, F23.

• Publication year

  2020

• Venue

  World Scientific Lecture Notes in Economics and Policy

• Publication date

  2020-08-27

• Fields of study

  Not labeled

• Identifiers
  DOI 10.1142/9789811220845_0009
• External record

  Open on Semantic Scholar

• Source metadata

  Semantic Scholar

• No claims are published for this paper.

• No concepts are published for this paper.

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