The book Trade-Related Investment Measures: Theory and Applications is a new impressive result of the continuous co-operation between Chi-Chur Chao, Associate Professor at Department of Economics, Deakin University, Australia and Eden S. H. Yu, Professor at the Chu Hai College of Higher Education, Hong Kong. The authors investigate key dimensions of trade policy measures related to foreign investments. As of today, the subject remains extremely relevant, as well as open to constant changes, and is hence very controversial. Indeed, most countries almost constantly generate a growing variety of rules aimed at regulating procedures that foreign investors have to follow while taking a broad range of business decisions. In these circumstances, any serious theoretical attempts to apply modern instruments of economic analysis to the existing practices in the field should be welcomed. Such attempts contribute to a better understanding of the impact foreign-owned companies – such as joint ventures (JVs) multinational corporations (MNCs) and similar entities – might have on the host economy.
The authors evaluate the impact of different specific trade-related investment measures (TRIMs) from the point of view of their welfare effects. This is the traditional approach in mainstream international economics and it has some obvious advantages, in particular helping to generalize and to bring various regulations to some kind of a common denominator. From that point of view, the book appears to be a solid piece of work with a well-defined and logical structure. The authors start with a brief overview of TRIMs (Chapter 1), followed by a short discussion of the applicability of distorted open economy general equilibrium models for the analysis in the subsequent sections of the book (Chapter 2). The next chapter deals with the interaction between environmental taxes and foreign investments. This type of analysis appears useful enough, given that environmental considerations might have a substantial impact on business decisions and the resulting allocation of resources. More than that, to a certain extent environmental requirements being imposed on JVs or MNCs are quite similar to the ‘classical’ TRIMs. It is not by chance that Chao and Yu, as well as some other experts, use the notion of trade-related environmental measures (TREMs). One more aspect that makes this book particularly useful is that this concept is discussed in depth in the subsequent chapters.
In general, the book is an interesting economic and mathematical study of the influence various trade policy instruments have on national welfare when applied to companies with foreign capital. The authors use well-known theories, applying them to specific cases. The most important contributions of the authors are the following.
The authors elaborate and present in Chapter 2 a model for a small open economy that allows, at a formal level, to integrate four theorems, namely the Heckscher–Ohlin theorem, the Factor Price Equalization theorem (Heckscher–Ohlin–Samuelson theorem), the Rybczynski theorem, and the Stolper–Samuelson theorem. This type of integration makes possible a more accurate (in comparison with previous studies) assessment of the quantitative relation between key factors influencing international trade and capital flows. Subsequently, the authors expand the model introducing various competition modes, extra factors, and additional characteristics for the initially investigated factors.
In Chapter 5, based on the three-sector general equilibrium model, Chao and Yu attempt to evaluate the repercussions of China's accession to the WTO for Chinese foreign trade. They compare the development of China's merchandise exports over two periods – prior to and after accession. At the same time, the authors do not provide enough justification regarding the applicability of the model, elaborated for a small open economy, to an open but definitely large China.
The authors subsequently consider international trade features in developed and developing countries. The model of a developing economy consists of two sectors: urban manufacture and rural agriculture (Chapter 16). Herewith features of state-owned monopolistic firms are perceived as the main actors in the manufacturing sector; wage inequality is perceived as a factor of foreign competition; and growth of social welfare is considered as a result of partial privatization and of foreign competition. The use of this kind of model is an interesting contribution to the theory of spatial development, given that this type of approach it not frequently applied to the analysis of developing economies.
Chapters 17, 18, and 19 are devoted to the Chinese experience in the application of TRIMs. In these chapters, the authors demonstrate how the theoretical issues raised in the previous chapters could be used to analyse domestic equity control and export performance. In addition, these chapters deal with certain trade policy instruments that are not TRIMs per se. For example, Chao and Yu study the impact of export duty rebates and tax rebates on Chinese welfare. The reviewers fully support the idea that these policies could be a better alternative in comparison with currency devaluation as the main driving force of export growth. Unlike the models in the previous chapters, this model possesses a functional design that is acceptable for national statistics analysis.
The conclusions of Chapter 17 support arguments in favour of domestic equity requirements, as they ‘may generate a beneficial effect through the accumulation of domestic capital assets’ (pp. 252–253). Such findings could have a long-lasting effect on trade policies in many developing countries. This might explain the unwillingness of some governments to liberalize their investment regimes.
Although the reviewers are very positive in their general assessment of this volume, it would also be fair to mention some of its debatable points and limitations. First, the focus on welfare effects, despite all its advantages, has its own weakness. In particular, either explicitly or implicitly, this focus excludes from the analysis a wide range of potentially mostly negative repercussions resulting from the activities of foreign-owned companies, such as social, political, and technological repercussions.
Second, most of the models of the Parts I–III are formulated and formalized in somewhat too general a manner. In these circumstances, the practical application of these models is not always clear. In particular, it would be necessary to explain whether some of these models are relevant to different economies.
Third, some models are based upon excessively unrealistic assumptions. For example, in most cases, the authors treat developed countries as small open economies, operating under the conditions of perfect competition. In particular, individual companies as main economic agents are in the position of price takers. One might reasonably ask whether many developed countries really meet these criteria. At the same time, developing countries, on the contrary, are perceived as large-scale economies.
Fourth, Chao and Yu apply the so-called ‘Shephard's lemma’ for the comparative analysis and choice between various instruments of environmental and investment policies. The problem is that ‘Shephard's lemma’ per se deals with the decisions made by consuming households or enterprises. One might sensibly ask whether the state/government really obeys the same rule and logic.
Finally, although the authors deliberately focus on the welfare effects of foreign investments, they do not present any clear-cut general conclusions on the impact of foreign direct investment (FDI) on recipient countries. In particular, in Chapter 14 they state that ‘foreign capital would be more welfare improving in the long run’ (p. 251). However, in the following chapter (Chapter 16), we find out that this might not be the case if foreign capital participates in privatization. Similarly, the authors demonstrate that, in the short run, these measures enhance national exports, even though in the short run this increase in exports might lead to welfare losses.
In certain instances, the authors challenge some ideas widely shared by the academic community. For example, the theory of FDI tells us that the presence of foreign companies in the national economy (especially in a developing one) might lead to an increase in wages, employment, productivity levels, and other positive outcomes, e.g. technology transfer. Therefore, governments use privatization as an instrument to attract foreign capital. In this regard, the conclusions drawn by the authors in Chapter 16 are rather controversial. In addition to the expected result that partial privatization or foreign competition can lead to wage inequality between skilled and unskilled labour, they support the view that ‘partial privatization or foreign competition reduces the urban output, thereby raising the goods price and unemployment ratio in the urban area’ (pp. 240–241). The reviewers have serious doubts that participation of foreign capital in privatization campaigns in most cases has indeed such effects.
In general, regardless of the above remarks, the volume represents deep and comprehensive research on the impact of trade-related investment measures on domestic welfare. Even though the application of TRIMS is analyzed in the book mainly with respect to the Chinese economy, other developing countries might benefit from a similar review of their policies with regard to foreign investors.
The book should be interesting to researchers that undertake their academic activities in similar fields; it may be noted, however, that the volume requires a good level of understanding of econometrics, as well as economic–mathematical modeling. The publication could be recommended also as valuable additional reading for a large variety of master programs in economics. At the same time, the book is too technical for policy makers, to say nothing about the general public. The technical nature of this volume makes it unsuited for disseminating the key ideas and findings to a wider audience. That would indeed be an important task – however, that task will have to be left to another publication written specifically for that purpose.
