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Can Import Tariffs Deter Outward FDI?

Collie, David Robert and Vandenbussche, Hylke 2005. Can Import Tariffs Deter Outward FDI? Open Economies Review 16 (4) , pp. 341-362. 10.1007/s11079-005-4741-5

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In this paper we analyze a country's optimal trade policy when its labor market is unionized and firms are footloose. We show that an important objective for governments to use import protection is to prevent their domestic multinationals to go to a non-unionized location abroad and to serve their country from a distance. A domestic government will set a positive tariff to dissuade its multinational from engaging in outward FDI when the additional profits it repatriates, do not compensate for the loss of domestic union rent. To put it differently, we show that when the domestic labor market is unionized, trade liberalisation between countries with similar wage levels is likely to result in domestic welfare losses as a result of outward FDI. Only when wage differences between countries are large enough, can outward FDI improve domestic welfare and optimal tariffs will be zero.

Item Type: Article
Date Type: Publication
Status: Published
Schools: Business (Including Economics)
Subjects: H Social Sciences > H Social Sciences (General)
H Social Sciences > HB Economic Theory
J Political Science > JF Political institutions (General)
Uncontrolled Keywords: FDI; monopoly union; trade policy; Cournot competition
Publisher: Springer
ISSN: 0923-7992
Last Modified: 04 Jun 2017 04:25

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