Export-performance requirements, foreign investment quotas, and welfare in a small dynamic economy

This paper examines the welfare effects of trade-related investment measures (TRIMs) in an intertemporal model with accumulations of domestic capital and foreign bonds. The TRIMs considered are foreign-investment quotas and export-share requirements. Given a pre-existing tariff, the second-best policy to the host economy is a foreign-investment quota together with an export-share requirement. Hence, completely eliminating the use of TRIMs in the presence of tariffs, as agreed upon in the Uruguay Round of GATT in 1994, may be sub-optimal from the viewpoint of the host country.