The impact of trade-related investment measures in developing countries

Abstract

As foreign direct investment (FDI) grows rapidly in this highly integrated world, numerous new challenges confront the existing global trading system. Both developed countries and their developing counterparts have been trying to reach harmonious bilateral or multilateral agreements. However, disputes between multinational enterprises (MNEs) and host countries continue to increase as FOI rises. Trade Related Investment Measures (TRIMs) were proposed by the United States in the 1994 Uruguay Round as a way to create a better investment environment in both developed and developing countries. Since many theoretical and empirical analyses of TRIMs agreement are ambiguous or incomplete, this three-essay dissertation will examine theoretical and empirical trade-related investment policies with a focus on the strategic regulation of TRIMs policies in developing countries. The first essay provides background information about TRIMs agreement that are currently employed around the world. It also includes definitions, controversial debates and applications, a description of the theoretical framework for analysis of the TRIMs agreement and the historical development of the TRIMs agreement from the Uruguay Round to the Doha meeting in 2001. The objective of this essay is to emphasize the importance of the TRIMs agreement in the structure of the global economy and their significant economic impacts on host countries. The second essay considers the impacts of the TRIMs policies on developing countries by employing a theoretical model. A dynamic general equilibrium model is used to examine two types of TRIMs policy instruments, local content requirements (LCRs) and government investment incentives (GIIs), such as subsidies given to MNEs operating in host countries. The model shows that increasing LCRs will benefit the economy of developing countries through increases in R&D and technology transfer in the short run. However, in the long run, increased LCRs will hinder their economic development because production of less competitive goods of higher cost will reduce domestic demand. GIIs use in developing countries will result in increase in available resource inputs for relative wages for R&D or technology adapting sector, while decreasing these inputs and relative wages for manufacturing sectors. Finally, the third essay studies TRIMs policies in a CGE (Computable General Equilibrium) model of a small open economy, and quantifies the economic impacts of the strengthening of TRIMs policies under a post Uruguay Round scenario in Tunisia. The employed model is based on the model of Konan and Maskus (2000), which concentrates on trade liberalization in Tunisia. In our model, the policy instruments are government subsidies and taxes. Strengthening of these TRIMs policies was examined for 35 sectors. In order to analyze TRIMs policies, another important feature, FDI, was integrated into this CGE model. It was found that TRIMs policies tend to have a significant impact on service and other capital-intensive sectors, but have only a minor impact on mining, utilities, agriculture and other highly protected and labor intensive sectors. Government taxes on MNEs would cause a loss in the GDP of a host country and lower its relative wages, while investment incentives would increase both the GDP of the host country and its relative wages.