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Open Economies Review

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

Can Import Tariffs Deter Outward FDI?

  • David Collie
  • Hylke Vandenbussche
Article
  • 175 Downloads

Abstract

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.

Keywords

FDI monopoly union trade policy Cournot competition 

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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

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