I recently came across a paper on the WTO web site (of all places: see http://www.wto.org/wto/research/wpaps.htm) whose abstract appears below. I requested and recently received a copy of the full paper. The mathematics of the paper is well beyond my economic theory, but what I read it as saying is that if a trade surplus is more than negated by income to foreign-owned factors (as it is in New Zealand) then tariff reductions are immiserising (optimal tariffs are positive); and similarly when foreign investment increases trade to the country. Such effects are not unexpected given capital mobility, but I haven't seen it spelt out before in this way. Mind you I'm always skeptical about such models... Any views on this line of argument? Anyone know if it is more fully developed anywhere in recent times? What would the true believers in free trade respond? Bill Rosenberg Tariff Reforms Under Foreign Factor Ownership No: ERAD-97-01 Marcelo Olarreaga World Trade Organization, and Geneva University February 1997 Keywords: Foreign-Owned Factors, Trade-Promoting, Trade-Substituting, Trade Pattern-Differential JEL codes: F11, F13, F21 Abstract: In the presence of foreign factor ownership, the traditional welfare effects of tariff reforms have to be reconsidered to include income redistribution between national and foreign-owned factors. Bhagwati and Brecher (1980) showed that when the relative amount of foreign-owned factors in the host country is sufficiently large as to induce a change in the direction of the trade pattern, immiserising tariff reductions may occur. Here it is shown that in the mirror case when foreign-owned factors tend to promote the existing trade pattern (i.e. trade-promoting), similar results can be obtained. On the other hand, when foreign factors are trade-substituting, tariff reductions cannot be immiserising. Extending the analysis to the case of trade-diverting Free Trade Areas, it is shown that national welfare may improve if foreign factors are trade-substituting.
