Journal
JOURNAL OF PUBLIC ECONOMICS
Volume 88, Issue 12, Pages 2745-2763Publisher
ELSEVIER SCIENCE SA
DOI: 10.1016/j.jpubeco.2004.03.002
Keywords
preferential trade agreements; tax competition; multinational enterprises
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This paper examines how free-trade agreements and customs unions affect the location of foreign direct investment (FDI) and social welfare, taking into account that governments may adjust taxes and external tariffs to compete for FDI. Conditions are identified under which a free-trade agreement leads to FDI and under which this improves welfare. The welfare effect is shown to depend on the relative size of efficiency gains in production and government revenue losses due to tax competition. A free-trade agreement may fail to induce welfare-improving 17131, creating a role for a customs union. (C) 2004 Elsevier B.V. All rights reserved.
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