Elsevier

Economics Letters

Volume 84, Issue 1, July 2004, Pages 133-140
Economics Letters

Multilateral trade and investment liberalization: effects on welfare and GDP per capita convergence

https://doi.org/10.1016/j.econlet.2003.12.020Get rights and content

Abstract

In a three factor and three country knowledge-capital model of trade and multinational activity, we look at the consequences of different trade and investment liberalization scenarios on the countries' welfare and convergence in GDP per capita.

Introduction

After the failure of the OECD's multilateral agreement on investment (MAI), the European Commission promotes now such an agreement with the developing economies. In addition to liberalizing investment, the simultaneous reduction of trade barriers in line with the WTO criteria is on the agenda. The likelihood of such an agreement coming into place depends on (i) whether it generates positive welfare effects for both the EU and the developing economies so that all parties are likely to agree, and (ii) whether bilateral agreements are preferable as compared to their multilateral counterpart. A prerequisite of the agreement to be politically sustainable in the long run is that GDP per capita convergence is fostered between the involved economies, since the success of economic policy in the developing countries is conveniently evaluated in terms of macroeconomic conditions, such as catching up in GDP per capita.1

We assess these two questions in a numerically solvable general equilibrium model of trade and multinational activity: (i) the welfare effects of a multilateral trade and investment liberalization (MUTIL) as compared to pure multilateral investment liberalization (MUIL), pure multilateral trade liberalization (MUTL) or a bilateral trade and investment liberalization (BITIL) and (ii) its impact on the differences in GDP per capita. We consider a three country variant of the knowledge-capital model of the multinational enterprise (MNE; Carr et al., 2001, Markusen, 2002, Markusen and Maskus, 2002). In this model, both horizontal multinationals (Markusen and Venables, 2000) with production facilities also in the high-wage parent country and vertical multinationals (Helpman, 1984) without production facilities at home may arise endogenously and coexist with pure national firms (NEs) without foreign affiliates.

Section snippets

Theoretical model

We assume a nested utility function in homogeneous Z-goods and differentiated X-goods (Dixit and Stiglitz, 1977):Ui=Fiixiiϵ−1ϵ+Fjixji(1+τ)(1+t)ϵ−1ϵ+Fkixki(1+τ)(1+t)ϵ−1ϵϵαϵ−1·(Zii+Zji+Zki)1−αFii=(ni+hij+hik+hijk+hji+hjik+hki+hkij+vji+vjik+vki+vkij)Fji=(nj+hjk+hkj+vij+vijk+vkj)Fki=(nk+hkj+hjk+vik+vijk+vjk),where Ui is country i's welfare level, i=1, 2, 3, α refers to the fixed Cobb–Douglas expenditure share for differentiated goods, and ϵ>1 denotes the elasticity of substitution between

Effects of a multilateral trade and investment cost liberalization

To assess the welfare impact of MUTIL or BITIL (measured by the equivalent variation) and GDP per capita convergence (measured by its standard deviation across the three countries), we have to solve the model numerically. Table 1 provides information on the chosen parameters. We fix the K and S abundant country i's endowment (associated with the EU) at a single point in the factor cube and set S endowments of the developing RoW at 20% of world endowments. In this way, we are able to confine the

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