Tariff Reductions 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. Jagdish N. Bhagwati and Richard A. Brecher (1980) showed that, when the relative amount of foreign-owned factors in the host country is sufficiently large to induce a change in the direction of the trade pattern, immiserizing 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 immiserizing.