Open Economies Review

, Volume 16, Issue 4, pp 341–362 | Cite as

Can Import Tariffs Deter Outward FDI?

  • David Collie
  • Hylke Vandenbussche


In this paper we analyze a country's optimal trade policy when its labor market is unionized and firms are footloose. We show that an important objective for governments to use import protection is to prevent their domestic multinationals to go to a non-unionized location abroad and to serve their country from a distance. A domestic government will set a positive tariff to dissuade its multinational from engaging in outward FDI when the additional profits it repatriates, do not compensate for the loss of domestic union rent. To put it differently, we show that when the domestic labor market is unionized, trade liberalisation between countries with similar wage levels is likely to result in domestic welfare losses as a result of outward FDI. Only when wage differences between countries are large enough, can outward FDI improve domestic welfare and optimal tariffs will be zero.


FDI monopoly union trade policy Cournot competition 


Unable to display preview. Download preview PDF.

Unable to display preview. Download preview PDF.


  1. Aitken, Brian, Anne Harrison, and Robert Lipsey (1995) “Wages and Foreign Ownership: A Comparative Study of Mexico, Venezuela and the US”, NBER WP no 5102.Google Scholar
  2. Belderbos, Rene (1997) “Antidumping and Tariff Jumping Japanese firms' DFI in the EU and US.” Weltwirtschaftliches Archiv 133(3):419–457.Google Scholar
  3. Blonigen, Bruce and Yuka Ohno (1998) “Endogenous Protection, Foreign Direct Investment, and Protection building Trade.” Journal of International Economics 46:205–227.CrossRefGoogle Scholar
  4. Booth, Allison (1995) Trade Unions. Cambridge University Press, p. 295.Google Scholar
  5. Brander, James and Barbara Spencer (1981) “Tariffs and the Extraction of Monopoly Rents Under Potential Entry.” Canadian Journal of Economics 3:374–389.Google Scholar
  6. Bughin, Jacques and Stefanno Vannini (1995) “Strategic Direct Investment Under Unionised Oligopoly.” International Journal of Industrial Organisation 13:127–145.CrossRefGoogle Scholar
  7. Dei, Fumo (1990) “A Note on Multinational Corporations in a Model of Reciprocal Dumping.” Journal of International Economics 29(1–2):161–171.Google Scholar
  8. Feenstra, Robert and Gordon Hanson (1996) “Globalization, Outsourcing and Wage Inequality.” American Economic Review 86(2):240–245.Google Scholar
  9. Haufler, Andreas and Ian Wooton (1999) “Tax Competition for Foreign Direct Investment.” Journal of Public Economics 71:121–139.CrossRefGoogle Scholar
  10. Hillman, Arye and Heinrich Ursprung (1993) “Multinational Firms, Political Competition and International Trade Policy.” International Economic Review 34(2) May:347–364.Google Scholar
  11. Lankes, Hans-Peter and Anthony Venables (1996) “FDI in Economic Transition: The Changing Pattern of Investments.” Economics of Transition 4(2):331–347.Google Scholar
  12. Leahy, Dermot and Catia Montagna (2000) “Unionisation and Foreign Direct Investment. Challenging Conventional Wisdom?” Economic Journal 110(462).CrossRefGoogle Scholar
  13. Lommerud, Kjell Erik, Frode Meland, and Lars Sorgard (2003) “Unionised Oligopoly, Trade Liberalisation and Location Choice.” Economic Journal 113:782–800.CrossRefGoogle Scholar
  14. Mezzetti, Claude and Eli Dinopoulos (1991) “Domestic Unionization and Import Competition.” Journal of International Economics 31:79–100.CrossRefGoogle Scholar
  15. Naylor, Robin (1999) “Union Wage Strategies and International Trade.” Economic Journal 109:102–125.CrossRefGoogle Scholar
  16. Pain, Nigel and Katherine Wakelin (1998) “Export Performance and the Role of FDI.” The Manchester School 5–16.Google Scholar
  17. Rowthorn, Robert (1992) “Intra-Industry Trade and Investment under Oligopoly; The Rrole of Market Size.” Economic Journal 35–69.Google Scholar
  18. Slaughter, Matthew (1995) “Multinational Corporations, Outsourcing and American Wage Divergence.” NBER working paper 5253.Google Scholar
  19. Veugelers, Reinhilde and Hylke Vandenbussche (1999) “European Antidumping Policy and the profitability of National and International collusion.” European Economic Review January 43/1:1–28.Google Scholar
  20. Zhao, Laixun (1995) “Cross-Hauling Direct Foreign Investment and Unionized Oligopoly.” European Economic Review 39:1237–1253.CrossRefGoogle Scholar

Copyright information

© Springer Science + Business Media, Inc. 2005

Authors and Affiliations

  1. 1.Cardiff Business SchoolCardiff UniversityCardiffUnited Kingdom
  2. 2.Université Catholique de Louvain-la-NeuveLouvain-la-NeuveBelgium

Personalised recommendations