Endogenous protection, foreign direct investment and protection-building trade

We introduce the possibility of foreign direct investment (FDI) in a strategic, oligopolistic setting with endogenous protection and find that a number of unique subgame-perfect equilibria may arise, including a new result we call "protection-building trade." This phenomenon occurs in our model when foreign firms locating production in the home country try to increase protectionist pressures in the home country (through increased exports) to provide larger barriers against other foreign competitors in future periods. We discuss how the foreign firm behavior surrounding significant U.S. protectionist actions, including the VERs on Japanese automobiles, may be consistent with protection-building trade behavior. (C) 1998 Elsevier Science B.V. All rights reserved.