Regional Trade Agreements and Foreign Direct Investment: Impact of Existing RTAs on FDI and Trade Flows in the Andean Community and Implications of a Hemispheric RTA in the Americas

Abstract

This paper discusses the possible impact of RTAs on FDI and trade flows in the Americas. First, it briefly looks at selected RTAs with investment protection, namely the North American Free Trade Agreement (NAFTA), the Group of Three (G-3) and the Andean Community of Nations (ACN). It then analyses the effect of RTA membership on FDI flows in the Andean subregion by constructing, running and testing a gravity model with data for the period 1992-2001. The evidence suggests that RTAs in the region foster trade and divert FDI in the ACN despite investment protection. The study finalizes by considering the implications of the Free Trade Area of the Americas (FTAA), a hemispheric RTA with investment protection, on FDI flows.

Keywords: FDI, RTAs, investment protection, trade creation

JEL Classification: F14, F15, F21, F36, K33