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