DP1411 Trade Liberalization and Investment in a Multilateral Framework

Author(s): Joseph Francois, Brad McDonald, Håkan Nordström
Publication Date: June 1996
Keyword(s): Trade and Capital Accumulation, Trade and Investment
JEL(s): F13, F4, F47
Programme Areas: International Trade and Regional Economics
Link to this Page: cepr.org/active/publications/discussion_papers/dp.php?dpno=1411

This paper explores trade policy and investment linkages in a multicountry framework. This is done under alternative steady-state closure rules linking trade to consumption, production, and investment, and emphasizing the general equilibrium nature of capital accumulation mechanisms. When policy shocks are capital friendly, induced investment may be greater than suggested by current savings rates. As a result, multiplier-type analysis can be very misleading. The importance and direction of this magnification hinges critically on the sensitivity of savings rates with respect to real returns. As illustration, we offer a numerical assessment of the Uruguay Round, highlighting such linkages.