Tariff Reforms under Foreign Factor Ownership.

In the presence of foreign factor ownership, the traditional welfare effects of tariff reforms have to be reconsidered to include income redistribution between national and foreign-owned factors. Bhagwati and Brecher (1980) showed that when the relative amount of foreign-owned factors in the host country is sufficiently large as to induce a change in the direction of the trade pattern, immiserising tariff reductions may occur. Here it is shown that in the mirror case when foreign-owned factors tend to promote the existing trade pattern (i.e. trade-promoting), similar results can be obtained. On the other hand, when foreign factors are trade-substituting, tariff reductions cannot be immiserising. Extending the analysis to the case of trade-diverting Free Trade Areas, it is shown that national welfare may improve if foreign factors are trade-substituting.