Trade disputes, foreign direct investment and free trade agreements

Abstract

This dissertation consists of two independent empirical studies on the trade responses to trade disputes and the effects of free trade agreements on foreign direct investment. The first study examines China’s trade response to the U.S.-China trade disputes from2000 to 2006, using monthly product-level trade transaction data covering all Chinese exporters. It provides the first empirical evidence of the trade effects of all of the trade disputes occurring during the sample period, complementing the literature that is solely based on WTO disputes. I find a significant trade promoting effect on the export volumes of Chinese disputed products to the U.S. after China’s initiation of trade disputes against the U.S.’s WTO-inconsistent import restriction measures. I find that the export volumes to average non-U.S. markets significantly decrease, indicating a trade deflection effect. I also find that the export prices to the U.S. fall, whereas export prices to non-U.S. markets remain unchanged. Importantly, these trade effects result from disputes against the U.S.’s safeguard measures. I find that the trade promotion effect is attributable to both an extensive margin (i.e., more exporters)and an intensive margin(i.e., higher export volumes of surviving exporters), whereas the trade deflection effect is attributable to an extensive margin (i.e., less exporters to non-U.S. markets). The main results are robust based on a series of checks using alternative specifications and various datasets. The second study investigates the effects of free trade agreements (FTAs) on foreign direct investment (FDI). The few empirical studies on this topic have produced mixed results. I revisit this issue using a dataset that covers more countries and a longer time period. Furthermore, I include a reasonable set of FDI determinants as control variables, explicitly address the FTA endogeneity issue, and recognize the role of investment provisions embedded in some FTAs. I find that the endogeneity of FTA participation leads to upward biased estimates of FTA effects on FDI. In particular, after controlling for self-selection, FTAs reduce bilateral FDI between member countries by 34%. However, this negative effect is mitigated if an FTA includes some kinds of investment provisions. I also find non-linear effects of FTAs on FDI: an FTA reduces FDI between OECD countries by -58%, whereas an FTA raises FDI from OECD to non-OECD countries by 92%.