THE THEORY OF EXPLOITATIVE TRADE AND INVESTMENT POLICIES: A REFORMULATION AND SYNTHESIS**Research was made possible by a single-quarter leave granted by the University of Minnesota in the Spring of 1970, and carried out at the Institute for Advanced Studies in Vienna, Austria. The support of both these institutions is gratefully acknowledged

Publisher Summary This chapter discusses the theory of exploitative trade and investment policies. It is recognized in the classical doctrine that achievement of an international optimum would require not only a consensus as to the optimal distribution of output but also a willingness to implement that consensus by undertaking lump-sum redistributions of income. If the home country is a borrower and the foreign country specializes, it will be the home country's advantage to encourage the foreign country to withdraw some of its capital, as the resulting excess of capital in the lending country will lower its rate of return there, thus lowering the opportunity cost of borrowing capital. The rationale for taxing income from home capital invested abroad, or from foreign capital invested at home, is quite a different one when the foreign country diversifies. The cases in which the tariff rate and tax rate on income from foreign investment have opposite sign are termed as paradoxical.