Policy implications of international investment: Three essays on FDI, tariffs, and the WTO

This dissertation examines the relationship between international capital flows and endogenous tariffs in both a small open economy setting and when multilateral forums such as the World Trade Organization (WTO) are involved. Chapter one examines the effect of outward foreign direct investment (FDI) on the optimal tariff choice of the FDI-source country. The first part of the chapter shows that export platform FDI induces the investing country to liberalize its tariffs unilaterally, while the second half develops an efficiency argument against the Most Favored Nation (MFN) principle of non-discrimination in tariff setting. Chapter 2 demonstrates that international equity integration may mitigate the external terms of trade externalities that lead large countries to set inefficiently high tariffs, and may thereby substitute for negotiated tariff liberalization in eliminating the strategic manipulation of world prices. Finally, Chapter 3 shows that equilibrium trade imbalances can disturb the symmetry between import tariffs and export taxes found by Lerner (1936), and argues that Lerner symmetry does not generally obtain in many otherwise standard trade models with international investment.