On the welfare effects of trade and investment liberalization

Using a three-factor knowledge- and physical capital model of trade and multinational activity, we consider a set of policy experiments to assess the welfare effects of trade and investment liberalization in general equilibrium. Specifically, we address the question of whether and under which circumstances a single versus a combined trade/investment liberalization strategy or a unilateral versus a bilateral policy change is preferable from a single country's and the world's point of view. The focus of this paper is to look at three relevant questions. First, when is investment liberalization beneficial and when is it harmful for a single economy or the whole world? Second, is pure investment liberalization a welfare maximizing strategy? Third, when is either kind of liberalization (trade, investment, or both) welfare improving and when neither of them? (C) 2006 Elsevier B.V. All rights reserved.