Reevaluating the Role of Trade Agreements: Do International Equity Holdings Make the Wto Obsolete?

Abstract:     
This paper demonstrates that international ownership can mitigate the incentives that lead large countries to set inefficiently high tariffs, and may thereby substitute for negotiated tariff liberalization in reaching globally efficient patterns of trade. The policy prediction is unclear, however, because offshore ownership simultaneously introduces the potential for expropriative government behavior by local investment-host countries, which can extract rents from foreign investors by expanding local market access beyond efficient levels. Regardless of the pattern of international ownership across countries and industries, the basic principle of reciprocity continues to serve as an important guide to efficiency, though its formal definition must be modified to account for the pattern of international equity holdings.

Keywords: Trade Agreements, WTO, FDI, International Investment

JEL Classifications: F13, F15, F21

Working Paper Series