Tax Policies, Regional Trade Agreements and Foreign Direct Investment: A Welfare Analysis

28 Pages Posted: 18 May 2016

See all articles by Charles Braymen

Charles Braymen

Creighton University - Department of Economics

Yang‐Ming Chang

Kansas State University

Zijun Luo

Sam Houston State University - College of Business Administration - Department of Economics and International Business

Date Written: May 2016

Abstract

In this paper, we develop a partial equilibrium three‐country model to examine the relationship between regional trade agreements (RTAs) and foreign direct investment (FDI) in an environment with double taxation. Our analysis shows that FDI is welfare‐improving for at least one or both of the two regional countries if wage asymmetry is significantly large. FDI and an RTA are also welfare‐improving for the high‐wage country and the region if the wage differential is not small. We also examine the role of repatriation taxes in affecting the determination of firm location under an RTA. Our results suggest that the signing of an RTA may induce relocation from the high‐wage country to the low‐wage country unless an increase in the repatriation tax rate also occurs.

Suggested Citation

Braymen, Charles and Chang, Yang‐Ming and Luo, Zijun, Tax Policies, Regional Trade Agreements and Foreign Direct Investment: A Welfare Analysis (May 2016). Pacific Economic Review, Vol. 21, Issue 2, pp. 123-150, 2016, Available at SSRN: https://ssrn.com/abstract=2781280 or http://dx.doi.org/10.1111/1468-0106.12077

Charles Braymen (Contact Author)

Creighton University - Department of Economics ( email )

2500 California Plaza
Omaha, NE 68178
United States

Yang‐Ming Chang

Kansas State University

Manhattan, KS 66506-4001
United States

Zijun Luo

Sam Houston State University - College of Business Administration - Department of Economics and International Business ( email )

SHSU Box 2118
Huntsville, TX 77341-2118
United States

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