Direct Investment Liberalization, Commodity Trade, and Income Distribution: What Can the WTO Do?

This paper analyzes a model of two-way movement of physical capital, and examines the e¤ects of direct investment liberalization on resource allocation, income distribution, and commodity trade. If either country or both countries liberalizes investment under exogenously given commodity prices, some factor owners in a country will gain but some others will lose. If capital movement a¤ects commodity prices, there are cases in which all factor owners in a country are better o¤ after multilateral investment liberalization. In these cases, it will be much easier for the home country to sign an agreement liberalizing investment ‡ows. This paper was presented at the workshop on “WTO and World Trade,” Seattle, December 4, 1999 (http://faculty.washington.edu/karyiu/ ) and at the workshop on WTO at University of California, Santa Cruz, May 12, 2000. Thanks are due to Theo Eicher and the participants of the two workshops for comments. Copies of this paper can be obtained online at http://faculty.washington.edu/karyiu/. c ° Kar-yiu Wong.