TAX POLICIES, REGIONAL TRADE AGREEMENTS AND FOREIGN DIRECT INVESTMENT: A WELFARE ANALYSIS

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.