International Cooperation in Trade and Investment: When Does Linking the Agreements Work?
(job market paper)
Abstract. We analyze the structure of cooperation between two countries facing two policy dilemmas in an environment with two way goods and capital flows. Governments maximize corresponding social welfares by imposing tariffs on imports and taxes on repatriated profits in incoming Foreign Direct Investment. Repeated nature of the interaction provides governments with the ability to sign self-enforcing agreements in order to avoid unilaterally optimal but jointly inefficient tariffs and taxes. We show that when issues are independent and countries are symmetric, signing separate agreements for tariffs (Free Trade Agreements-FTA) and for taxes (Tax Treaties-TT) provides the same amount enforcement as signing a linked agreement. However, linkage can still improve the joint welfare by transferring the slack enforcement power in a case of asymmetric issues or countries. We report non-results in two cases where the policy issues are interconnected due to technological spillover effect of FDI. Moreover, we show that linking the agreements actually reduces enforcement when agreements are linked under a limited punishment rule and policy variables are strategic substitutes.
JEL Classification Codes: F13, F15, F24, F53, F55
Keywords: Free Trade Agreements, Tax Treaties, Linking Issues
Starting Small in Free Trade Agreements
(Florida International University, Working Paper Series #09-05)
Abstract. This paper analyzes the structure of cooperation between two large countries under one-sided incomplete information. Foreign government privately observes its likelihood of experiencing a political economy shock in each period. Home government’s prior belief about this likelihood is updated in a Bayesian fashion as the relationship continues. We show that the home government employs its privilege to design a contract so as to start with a few-goods-agreement, and increase the extent of cooperation gradually as its belief is favorably updated through periods. We also provide the conditions under which the home government makes the partner reveal its type in the beginning, or enables it to stay in a cooperative relationship without a complete revelation. As opposed to conventional approaches that relate gradualism with cost of liberalization, we show that asymmetric information provides a sufficient reason for gradualism to emerge.
JEL Classification Codes: F13, F15, D82, D86, F53
Keywords: Gradualism, Free Trade Agreements, Asymmetric Information