موافقت نامه های تجارت ترجیحی و رقابت های مالیاتی برای سرمایه گذاری مستقیم خارجی

This paper examines how free-trade agreements and customs unions affect the location of foreign direct investment (FDI) and social welfare, taking into account that governments may adjust taxes and external tariffs to compete for FDI. Conditions are identified under which a free-trade agreement leads to FDI and under which this improves welfare. The welfare effect is shown to depend on the relative size of efficiency gains in production and government revenue losses due to tax competition. A free-trade agreement may fail to induce welfare-improving FDI, creating a role for a customs union.

This paper examines the effect of preferential trade agreements on the location of foreign direct investment (FDI) and social welfare, taking into account that governments may adjust their tax policy to compete for FDI. There is considerable empirical evidence that preferential trade agreements, such as free-trade areas (FTAs) and customs unions (CUs), affect FDI flows. For instance, the creation of the European customs union in 1968 and especially the Single European Act of 1986/1987 were associated with significant inflows of US and Japanese FDI (see, for instance, Motta and Norman, 1996 and Pain, 1997). Inflows were particularly strong in relatively low-cost locations, such as Ireland. Similar effects were observed in the case of the North American Free Trade Agreement (NAFTA), which particularly boosted FDI into Mexico. Some authors, including Ethier (1998), have argued that attracting FDI was in fact one of the main reasons why some countries have pursued such agreements. Many preferential trade agreements, including NAFTA, explicitly stipulate the removal of FDI review procedures and other barriers to direct investment. Another possible effect of the removal of internal trade barriers is that companies may rationalize and concentrate production in low-cost locations within the preferential trade area. This was pointed out, for instance, by the Royal Commission (1985) and Pain (1997). Empirical evidence of this effect for NAFTA is found by Niosi (1994). Given the potential of preferential trade agreements to affect the location choices of foreign investors, governments may find it tempting to intervene to try to attract new firms or to prevent existing firms from leaving. Competition for FDI especially on an intra-regional basis is well documented, and there is some evidence that it has increased in line with regional integration (Bond and Guisinger, 1985). Benassy-Quere et al. (2000) find that nominal and effective corporate tax rates in the EU have decreased in the process of European integration. According to UNCTAD (1996, Table III.1), the use of fiscal incentives, such as tax holidays, to attract FDI has increased in Europe between the mid-1980s and early 1990s.1 The study reports a similar trend in the United States and Canada. The main objectives pursued with these incentives appear to have changed as well during this period. UNCTAD (1996, Table III.4) argues that in the EU as well as in the United States and Canada more incentives were given to stimulate FDI and exports and fewer were given for sectoral development and restructuring, priority industries, and research and development. Examples of incentive-based competition in Europe are listed in Table 1. These examples suggest that multinational firms, after identifying possible locations for a project, shop around for the most attractive combination of location-specific fundamentals and incentives (see also Oman, 2000). In the UNCTAD survey, Samsung offered as key factors influencing its decision to invest in England (i) access to the European single market; (ii) high labor productivity and competitive wage rates; (iii) an attractive incentive package; and (iv) good transport infrastructure to markets. Mercedes-Benz and Swatch gave almost exactly the same reasons for their choice of locating in France, as did Ford and Volkswagen for their decision to locate in Spain. The desire to supply the European market from a single low-cost location within the EU providing significant incentives also appears in many of the other examples listed in the UNCTAD survey (UNCTAD, 1996, Boxes III.4 to III.5).

This paper examined the effects of a preferential trade agreement on the location choice of a foreign investor, tax competition and social welfare. It was shown that a free-trade agreement may lead to FDI creation or consolidation, but not to FDI destruction. For FDI creation to occur the production costs in h and l must be in an intermediate range relative to the production cost in the rest of the world. In particular, they must be sufficiently large so that in the absence of free internal trade countries individually prefer to rely on imports from the rest of the world. But they must be small enough so that when markets are integrated no country has an incentive to deter FDI. FDI creation represents a Pareto improvement irrespective of the degree of tax competition, if the production cost in the low-cost country in the free-trade area is sufficiently lower than that in the rest of the world, so that the high-cost country is not hurt if it has to import the good from its partner country rather than from the rest of the world. However, even if this is not the case and trade deflection hurts the high-cost country, a free-trade agreement may still raise the aggregate welfare of its members. This happens if the cost differential within the free-trade area is sufficiently large (and hence the degree of tax competition small) and the production cost in the low-cost location in the free-trade area is sufficiently low compared to that in the rest of the world. If the cost advantage of the potential free-trade area relative to the rest of the world is small or nonexistent, free trade may fail to induce FDI, even if FDI is welfare improving. There are two reasons why this may happen. First, there may be multiple equilibria and the countries may fail to coordinate on an equilibrium with FDI. Second, the high-cost country may have an incentive to deviate from an FDI equilibrium by reducing its external tariff so that the firm supplies it from the rest of the world. In both cases, a CU can bring about FDI and thus improve welfare, as it allows the countries to coordinate on the appropriate common external tariff. If the firm had invested in both countries of the potential free-trade area, then integration will lead to FDI consolidation. Moreover, tax competition will force tax rates down. Yet, the free-trade area will still raise joint welfare of the member countries, if the fixed cost of investment is large and the cost differential (degree of tax competition) within the free-trade area is sufficiently big (small). Finally, the paper considered an extension where the firm was also partly owned by residents of the free-trade area or customs union and showed that this does not affect equilibrium tax rates. Residents of the high-cost country may now benefit from a preferential trade agreement (even if they did not under full foreign ownership of the firm), because the resulting tax competition raises the firm's after-tax profit of which they receive a share.