International Capital Mobility and Free Trade Once Again

Authors

  • Ravi Batra,

    Corresponding author
    1. Southern Methodist University
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  • Hamid Beladi

    Corresponding author
    1. Department of Economics, College of Business, University of Texas at San Antonio, One UTSA Circle, San Antonio, TX 78249, USA
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    • The authors are grateful to anonymous referees for constructive comments on an earlier version of this paper. The usual disclaimer applies.


Beladi: Department of Economics, College of Business, University of Texas at San Antonio, One UTSA Circle, San Antonio, TX 78249, USA. E-mail: hamid.beladi@utsa.edu. Batra: Southern Methodist University, E-mail: rbatra@mail.smu.edu.

Abstract

Using a Heckscher–Ohlin model, this paper re-examines Robert Mundell's famous thesis that free trade and unimpeded capital mobility are perfect substitutes. Under very general conditions which, according to many economists, have caused international convergence of factor rewards, we show that in a polluted environment free trade is inferior to free international investment. This happens even though commodity prices and factor rewards are the same with both policies. The practical side of our thesis is that the world will be better off by reducing the volume of trade while removing all barriers to foreign direct investment that at present hamper the service industries.

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