Tariffs have almost completely disappeared but various restrictions on foreign entry remain for multinationals. Many trade agreements and Bilateral Investment Treaties (BITs) have been signed to lower tariffs and reduce the risks of expropriation. Why do we see so few agreements removing FDI entry barriers? Could the contemporary rise of tax havens where multinationals can shift their profits explain the absence of FDI agreements? In this paper I develop a model in which governments can restrict the entry of foreign affiliates and multinationals can shift their profits across countries. I first demonstrate that the possibility for multinationals to repatriate their profits is a determinant of FDI restrictions. An agreement can solve for the resulting inefficiency. However, I show that an agreement is made unnecessary when (i) there is foreign lobbying that pushes for more entry, or when (ii) firms can shift profits to tax havens. Tax treaties that reduce profit shifting would be a first step towards more agreements that reduce FDI restrictions. I conclude by providing empirical evidence that profit shifting affects the choice of FDI restrictions.
Defence date: 17 June 2016 ; Examining Board: Professor Piero Gottardi, EUI, Supervisor; Professor Paola Conconi, Université Libre de Bruxelles; Professor Bernard Hoekman, RSCAS; Professor Thierry Verdier, Paris School of Economics. ; This thesis tackles three topics in international trade: (i) the motives behind restrictions on Foreign Direct Investments (FDI) and the role of investment agreements, (ii) the determinants of services trade policies, and (iii) the role of domestic institutions in affecting trade flows and the gains from trade. Tariffs have almost completely disappeared but various barriers that restrict FDI still remain. Many trade agreements and Bilateral Investment Treaties (BITs) have been signed to lower tariffs and reduce the risks of expropriation whereas few agreements have been signed to lower entry barriers. The first chapter looks at the interaction between political and economic motives for protectionism. Lobbies give contributions to the governments to affect the policies. The repatriation of profits by foreign affiliates leads governments to restrict the entry of multinationals. Given these two motives, the cooperative outcome, which differs from the chosen policy, can be implemented through an agreement. However I highlight two reasons that can explain why such agreements might be unnecessary. First foreign lobbying counteracts domestic lobbying and, under certain conditions, can push the government to choose the cooperative outcome without signing an agreement. Second the presence of tax havens where firms shift their profits removes the gains from cooperation and makes an agreement unnecessary. The second chapter focuses on the determinants of services trade agreements. Most of the literature on trade policy and agreements has focused on goods, tariffs and trade agreements whereas, in this paper, we study services, foreign direct investment and services agreements. We provide a rationale for governments to commit to liberalize. The third chapter contributes to the debate on the role of various institutions in affecting economic exchanges. We focus here on the role of contract enforcement in shaping the optimal organization of firms and the allocation of entrepreneurs across sectors. Different institutional qualities are a source of comparative advantage and export specialization. We find that liberalization leads to asymmetric gains of trade in terms of productivity and reallocation of resources. The country with the poorest institutions benefits less from trade than the country with the best institutions.
This paper studies the determinants of liberalization commitments in the context of trade in services used as intermediate inputs. Compared to goods, services inputs are mostly complementary to other factors of production and non-tradable. We build a theoretical trade policy framework in which (i) foreign investment as a way to contest a market for non-tradable services can be restricted by the government and (ii) the role of services as complementary inputs explains unilateral commitment to services trade liberalization. Commitment helps governments to avoid political pressures that would result in protectionist measures leading downstream producers to inefficiently reduce their production. In addition we provide new results on the influence of lobbying by both national firms and foreign multinationals. We discuss how the bargaining power of the government, the size of national services sectors and the difference in valuation between national and foreign contributions affect the willingness of the government to sign a services trade agreement.
Why do governments sign services trade agreements? This paper focuses on the role of international agreements in the context of trade in services when services are used as intermediate inputs in downstream industries. Compared to goods, services inputs are mostly non-tradable and complementary to other factors of production. We build a theoretical trade policy framework in which firms use foreign investment to contest foreign markets in services sectors and governments can restrict the entry of multinationals. Commitment helps governments to avoid political pressures that would result in protectionist measures leading downstream industries to inefficiently reduce their production. First we show that the role of services as complementary inputs is central to explain governments' commitment to services trade liberalization. Second we provide new results on the influence of lobbying by both national firms and foreign multinationals on trade policies and the gains from commitment. Finally we discuss how the bargaining power of the government, the size of national services sectors and the difference in valuation between national and foreign contributions affect the willingness of the government to sign a services trade agreement.
