International trade policy in the presence of foreign investment

The primary objective of this research is the study of the effects of changes in existing trade policies on the production and welfare of both capital-importing and capital-exporting countries.; The results of the first part of the dissertation are dependent upon a general equilibrium model of trade and capital mobility in a two-country framework. The model considers a simultaneous dynamic adjustment process in the commodity market and in the capital market, thereby obtaining concrete results concerning the effects of changing tariffs on the international terms of trade and the volume of foreign investment. A novel result is that, in the presence of foreign investment, an increase in tariffs by the debtor country may benefit the creditor country. Also, an improvement in the international commodity terms of trade is no longer a sufficient condition for a tariff to increase the country's real income even when the volume of trade effect is negligible.; The second part of the dissertation develops a multi-country general equilibrium model of specific factors to analyze the incentives for tariff negotiations between creditor and debtor countries. When more than two countries are involved, trade liberalization reforms will cause a relocation of the international mobile capital which, in turn, will have a global impact on production and welfare in all countries. A creditor country could benefit from higher tariffs imposed on the commodity produced with international capital because the tariffs increase both the demand for foreign investment and the rental rate of capital. Since a reduction in foreign tariffs would not only decrease the world demand for foreign investment but also reduce the rental rate of capital, the creditor country would not have any incentive to negotiate a free trade agreement on the commodity produced with international capital. The chapter also analyzes the implications of the resultant changes in tariffs enacted by one debtor country on the welfare of other debtor countries.; The third section explores the implications of quantity restriction policies when quota rents are shared by consumers in the two countries. The results suggest that quantity restrictions on imports may be a more advantageous commercial policy, as opposed to price control, for a country receiving foreign capital. For a creditor country, the optimum amount of capital to be invested in a protected foreign economy will depend on the distribution of the quota rents. The benefits from foreign investment will be greater the smaller the country's share of quota rent appropriations.