Capital Flow:

The standard HeckscherOhlin factor proportions model of international trade and focused primarily on the welfare effects of capital flows and the optimal combinations of tariffs and taxes on investments. Increasing levels of international capital mobility should reduce incentives among firms to lobby for protection and shift the balance of political support among business interests in favor of trade liberalization. This conclusion rests mainly on the standard Heckscher Ohlin factor proportions model of trade and the famous Mundell equivalency which states that factor flows and trade are substitutes. An exogenous rise in international capital mobility will mean that any protectionist rents generated for local firms by trade barriers will be more quickly and thoroughly dissipated by crossnational capital flows. The consequences for trade politics thus seem clear: as capital becomes more international or footloose firms should have less incentive to lobby for trade protection; indeed, multinational firms themselves should become vocal advocates for freer trade. Recent research has found that inflows of foreign direct investment into the United States do seem to deter tariffseeking by local firms socalled quid pro quo foreign investment. In addition, it seems evident that US firms engaging in more outward foreign direct investment are themselves more supportive of trade liberalization. The impact of higher levels of international capital mobility on the distributional effects of trade depends upon the degree of interindustry capital mobility. If capital is highly industryspecific, increased international mobility among some types of specific capital may actually increase rent seeking incentives among owners of other specific factors. The overall impact of the globalization of many types of production on support for freer trade is thus not necessarily positive. More recent theoretical work has suggested that capital flows might not only jump newlyimposed tariffs post facto, but might also anticipate political pressure for tariffs and defuse it ahead of time by substituting for exports socalled quid pro quo foreign investment.