الزامات عملکرد صادرات، سهمیه سرمایه گذاری خارجی، و رفاه در یک اقتصاد کوچک پویا

This paper examines the welfare effects of trade-related investment measures (TRIMs) in an intertemporal model with accumulations of domestic capital and foreign bonds. The TRIMs considered are foreign-investment quotas and export-share requirements. Given a pre-existing tariff, the second-best policy to the host economy is a foreign-investment quota together with an export-share requirement. Hence, completely eliminating the use of TRIMs in the presence of tariffs, as agreed upon in the Uruguay Round of GATT in 1994, may be sub-optimal from the viewpoint of the host country.

To circumvent widespread existing tariff barriers in commodity trade, firms have resorted to relocate a part or all of their production activities from home bases to foreign locations. This is known as the “tariff-jumping” motive of foreign direct investment (FDI).1 Tariff-jumping foreign investment, however, tends to reduce the host country's welfare for two reasons. First, foreign capital inflow exacerbates the existing tariff distortion through “overproduction” of the importable goods, in which the country has a comparative disadvantage.2 Second, foreign investment may crowd out a substantial amount of domestic investment, thereby slowing down the accumulation of domestic capital. To mitigate the tariff distortionary effect of foreign capital inflows, Rodrik (1987) suggests the use of an export-performance policy. This policy specifies that a portion of the output produced by foreign firms in the host country must be exported at world prices (which are lower than the tariff-inclusive domestic prices). The subsequent fall in the effective prices leads to a lower return to foreign capital and hence a smaller output. The contraction in the protected sector corrects the distortion exacerbated by foreign investment, rendering the policy of export requirements to be welfare improving.3 Alternatively, foreign capital inflows may be restricted to a certain level to avoid crowding out domestic investment. Foreign investment restrictions can be imposed in the form of quantity controls (i.e., foreign investment quotas) and/or by confirming foreign investment in certain sectors where domestic investment is deficient. Although there have been extensive studies on the welfare effect of exogenous inflows of foreign capital in static models,4 little attention has been given to the crowding-out effect of capital inflows and the effects of the export performance policy in a dynamic setting. In the agreements reached in the Uruguay Round of GATT in 1994, the export performance requirements, input import limitations and other policy interventions were lumped together under the generic heading “trade-related investment measures” (TRIMs).5 By now, TRIMs have become a major item for discussing among the member nations of the World Trade Organization (WTO). In this paper, we address two welfare issues relating to TRIMs: First, what is the optimal level of foreign-investment quotas in the presence of a tariff? Second, what is the optimal ratio of export requirements for correcting the tariff distortion exacerbated by foreign capital? To answer these two questions, an intertemporal model will be developed in Section 2, in which the short-run and the steady-state equilibrium will be analyzed. Section 3 examines the crowding-out and the welfare effects of foreign investment quotas and export-share requirements on foreign firms. In addition, individually and jointly optimal policies will be derived and discussed. Section 4 contains concluding remarks.

This paper has developed an intertemporal model with accumulations of domestic capital and foreign bonds. The pre-existing tariff barrier attracts foreign investment, and hence domestic and foreign firms co-exist in the host country. To protect domestic firms, trade-related investment measures, such as foreign-investment quotas and export-share requirements, are used against foreign firms. We have analyzed the intricate interactions between foreign-investment quotas and export-share requirements and the various welfare impacts of these investment measures. In the presence of tariff, the second-best policy is a foreign-investment quota together with an export-share requirement on foreign firms. Although tariffs have been recently reduced to relatively low levels under the auspices of the GATT and/or by some regional trade agreements, completely eliminating trade-related investment measures as agreed upon in the 1994 Uruguay Round of GATT negotiations would not be optimal for a country if the existing distortions, say, tariffs, cannot be totally abolished for political or other reasons. In this paper, we have focused on the jointly optimal policies of foreign-investment quotas and export-share requirements in the steady state. Nevertheless, the sequencing issue of these two policies is not considered. This is an interesting topic for future research.