Does trade hinder or help economic growth?

Is trade necessary for growth, or is it something an economy can do without? Is it just about differences in tastes, and diversifying consumption, or does trade create long-run differences in the wealth of nations? What are the consequences of trade beyond economic growth?

Blog Posts

External Links


Academic References

  1. Alcala, F. and Ciccone, A. (2004) “Trade and Productivity,” Quarterly Journal of Economics, 119(2), pp. 613–646.
    • Abstract

      We find that international trade has an economically significant and statistically robust positive effect on productivity. Our trade measure is imports plus exports relative to purchasing power parity GDP (real openness), which we argue is preferable on theoretical grounds to the nominal measure conventionally used. We also find a significantly positive aggregate scale effect. Our estimates control for proxies of institutional quality as well as geography and take into account the endogeneity of trade and institutional quality. Our analysis of the channels through which trade and scale affect productivity yields that they work through total factor productivity.

  2. Andersen, T. and Dalgaard, C.-J. (2011) “Flows of people, flows of ideas, and the inequality of nations,” Journal of Economic Growth. Springer Netherlands, 16(1), pp. 1–32. Available at: Link.
    • Abstract

      The present paper examines a neglected determinant of aggregate productivity: temporary cross-border flows of people. We hypothesize that interaction between people from different nations facilitates the international diffusion of ideas, thus stimulating aggregate productivity. In order to assess the causal impact of people flows on productivity, we construct an instrument for people flows. By analogy to the trade/growth literature, this instrument is derived from a fitted gravity equation involving geographic determinants of bilateral travel flows. Our cross-section analysis reveal that greater international interaction leads to higher productivity; a very similar result, qualitatively as well as quantitatively, is obtained when we employ dynamic panel data methods for the purpose of identification.

  3. Broda, C., Greenfield, J. and Weinstein, D. (2006) “From Groundnuts to Globalization: A Structural Estimate of Trade and Growth,” NBER Working Papers, (12512).
    • Abstract

      Starting with Romer [1987] and Rivera-Batiz-Romer [1991] economists have been able to model how trade enhances growth through the creation and import of new varieties. In this framework, international trade increases economic output through two channels. First, trade raises productivity levels because producers gain access to new imported varieties. Second, increases in the number of varieties drives down the cost of innovation and results in ever more variety creation. Using highly disaggregate trade data, e.g. Gabon’s imports of Gambian groundnuts, we structurally estimate the impact that new imports have had in approximately 4000 markets per country. We then move from groundnuts to globalization by building an exact TFP index that aggregates these micro gains to obtain an estimate of trade on productivity growth for each country. We find that in the typical country in the world, new imported varieties account for 15 percent of its productivity growth. These effects are larger in developing countries where the median impact of new imported varieties equals a quarter of national productivity growth.

  4. Coe, D. and Helpman, E. (1995) “International R&D Spillovers,” European Economic Review, 39(5), pp. 859–87.
    • Abstract

      Investment in research and development (R&D) affects a country’s total factor productivity. Recently new theories of economic growth have emphasized this link and have also identified a number of channels through which a country’s R&D affects total factor productivity of its trade partners. Following these theoretical developments we estimate the effects of a country’s R&D capital stock and the R&D capital stocks of its trade partners on the country’s total factor productivity. We find large effects of both domestic and foreign R&D capital stocks on total factor productivity. The foreign R&D capital stocks have particularly large effects on the smaller countries in our sample (that consists of 22 countries). Moreover, we find that about one-quarter of the worldwide benefits of investment in R&D in the seven largest economies are appropriated by their trade partners.

  5. Comin, D., Easterly, W. and Gong, E. (2010) “Was the Wealth of Nations Determined in 1000 BC?,” American Economic Journal: Macroeconomics. American Economic Association, 2(3), pp. pp. 65–97. Available at: Link.
    • Abstract

      We assemble a dataset on technology adoption in 1000 BC, 0 AD, and 1500 AD for the predecessors to today’s nation states. Technological differences are surprisingly persistent over long periods of time. Our most interesting, strong, and robust results are for the association of 1500 AD technology with per capita income and technology adoption today. We also find robust and significant technological persistence from 1000 BC to 0 AD, and from 0 AD to 1500 AD. The evidence is consistent with a model where the cost of adopting new technologies declines sufficiently with the current level of adoption.

  6. Comin, D. and Hobijn, B. (2010) “An Exploration of Technology Diffusion,” American Economic Review, 100(5), pp. 2031–59.
    • Abstract

      We develop a model that, at the aggregate level, is similar to the one-sector neoclassical growth model; at the disaggregate level, it has implications for the path of observable measures of technology adoption. We estimate it using data on the diffusion of 15 technologies in 166 countries over the last two centuries. Our results reveal that, on average, countries have adopted technologies 45 years after their invention. There is substantial variation across technologies and countries. Newer technologies have been adopted faster than old ones. The cross-country variation in the adoption of technologies accounts for at least 25 percent of per capita income differences.

  7. David, P. (1990) “The Dynamo and the Computer: An Historical Perspective on the Modern Productivity Paradox,” American Economic Review, 80(2), pp. 355–61.
  8. Frankel, J. A. and Romer, D. (1999) “Does Trade Cause Growth?,” The American Economic Review. American Economic Association, 89(3), pp. pp. 379–399. Available at: Link.
    • Abstract

      Examining the correlation between trade and income cannot identify the direction of causation between the two. Countries’ geographic characteristics, however, have important effects on trade, and are plausibly uncorrelated with other determinants of income. This paper therefore constructs measures of the geographic component of countries’ trade, and uses those measures to obtain instrumental variables estimates of the effect of trade on income. The results provide no evidence that ordinary least-squares estimates overstate the effects of trade. Further, they suggest that trade has a quantitatively large and robust, though only moderately statistically significant, positive effect on income.

  9. Galor, O. and Mountford, A. (2008) “Trading population for productivity: theory and evidence,” Review of Economic Studies. Wiley Online Library, 75(4), pp. 1143–1179.
    • Abstract

      This research argues that the differential effect of international trade on the demand for human capital across countries has been a major determinant of the distribution of income and population across the globe. In developed countries the gains from trade have been directed towards investment in education and growth in income per capita, whereas a significant portion of these gains in less developed economies has been chanelled towards population growth. Cross-country regressions establish that indeed trade has positive effects on fertility and negative effects on education in non-OECD economies, while inducing fertility decline and human capital formation in OECD economies.

  10. Griffith, R., Redding, S. and Reenen, J. van (2004) “Mapping the Two Faces of R&D: Productivity Growth in a panel of OECD Countries,” Review of Economics and Statistics, 86(4), pp. 883–895.
    • Abstract

      Many writers have claimed that research and development (R&D) has two faces. In addition to the conventional role of stimulating innovation, R&D enhances technology transfer (absorptive capacity). We explore this idea empirically using a panel of industries across twelve OECD countries. We find R&D to be statistically and economically important in both technological catch-up and innovation. Human capital also plays an major role in productivity growth, but we only find a small effect of trade. In failing to take account of R&D-based absorptive capacity, existing U.S.-based studies may underestimate the return to R&D.

  11. Hanlon, W. W. (2015) “Necessity Is the Mother of Invention: Input Supplies and Directed Technical Change,” Econometrica. Blackwell Publishing Ltd, 83(1), pp. 67–100. doi: 10.3982/ECTA10811.
    • Abstract

      This study provides causal evidence that a shock to the relative supply of inputs to production can (1) affect the direction of technological progress and (2) lead to a rebound in the relative price of the input that became relatively more abundant (the strong induced-bias hypothesis). I exploit the impact of the U.S. Civil War on the British cotton textile industry, which reduced supplies of cotton from the Southern United States, forcing British producers to shift to lower-quality Indian cotton. Using detailed new data, I show that this shift induced the development of new technologies that augmented Indian cotton. As these new technologies became available, I show that the relative price of Indian/U.S. cotton rebounded to its pre-war level, despite the increased relative supply of Indian cotton. This is the first paper to establish both of these patterns empirically, lending support to the two key predictions of leading directed technical change theories.

  12. Keller, W. (2004) “International Technology Diffusion,” Journal of Economic Literature. American Economic Association, 42(3), pp. 752–782. Available at: Link.
    • Abstract

      This paper surveys what is known about the extent of international technology diffusion and channels through which technology spreads. Productivity differences explain much of the variation in incomes across countries, and technology plays a key role in determining productivity. The pattern of worldwide technical change is determined largely by international technology diffusion because a few rich countries account for most of the world’s creation of new technology. Cross-country income convergence turns on whether technology diffusion is global or local. There is no indication that international diffusion is inevitable or automatic, but rather, domestic technology investments are necessary. Better understanding of what determines the effectiveness of technology diffusion sheds light on the pace at which the world’s technology frontier may expand.

  13. Keller, W. (2002) “Trade and the Transmission of Technology,” Journal of Economic Growth. Springer Netherlands, 7(1), pp. 5–24. Available at: Link.
    • Abstract

      This paper integrates earlier studies on the link of productivity and research and development (R&D) in different industries of a closed economy with the more recent emphasis on R&D-driven growth and international trade in open economies. In this framework, technology in the form of product designs is transmitted to other industries, both domestically as well as internationally, through trade in differentiated intermediate goods. I present empirical results based on a new industry-level data set that covers more than 65 percent of the world’s manufacturing output and most of the world’s R&D expenditures between 1970 and 1991. The analysis considers productivity effects from R&D in the domestic industry itself, from R&D in other domestic industries, as well as in the same and other foreign industries. I estimate strong productivity effects both from own R&D spending and R&D conducted elsewhere. The contribution of R&D in the industry itself is about 50 percent in this sample. Domestic R&D in other industries is the source of 30 percent of the productivity increases, and the remaining 20 percent are due to R&D expenditures in foreign industries.

  14. Pavcnik, N. (2002) “Trade Liberalization, Exit, and Productivity Improvement: Evidence from Chilean Plants,” Review of Economic Studies, 69(1), pp. 245–76. Available at: Link.
    • Abstract

      This paper empirically investigates the effects of trade liberalization on plant productivity in the case of Chile. Chile presents an interesting setting to study this relationship since it underwent a massive trade liberalization that significantly exposed its plants to competition from abroad during the late 1970s and early 1980s. Methodologically, I approach this question in two steps. In the first step, I estimate a production function to obtain a measure of plant productivity. I estimate the production function semi-parametrically to correct for the presence of selection and simultaneity biases in the estimates of the input coefficients required to construct a productivity measure. I explicitly incorporate plant exit in the estimation to correct for the selection problem induced by liquidated plants. These methodological aspects are important in obtaining a reliable plant-level productivity measure based on consistent estimates of the input coefficients. In the second step, I identify the impact of trade liberalization on plants’ productivity in a regression framework allowing variation in productivity over time and across traded- and non-traded-goods sectors. Using plant-level panel data on Chilean manufacturers, I find evidence of within plant productivity improvements that can be attributed to a liberalized trade policy, especially for the plants in the import-competing sector. In many cases, aggregate productivity improvements stem from the reshuffling of resources and output from less to more efficient producers.

      (This abstract was borrowed from another version of this item.)

      </details></li> </ul> </div> </li>
    • Ramondo, N. and Rodriguez-Clare, A. (forthcoming) “Trade, Multinational Production, and the Gains from Openness,” Journal of Political Economy.
      • Abstract

        This paper quantifies the gains from openness arising from trade and multinational production (MP). We present a model that captures key dimensions of the interaction between these two flows: Trade and MP are competing ways to serve a foreign market; MP relies on imports of intermediate goods from the home country; and foreign affiliates of multinationals can export part of their output. The calibrated model implies that the gains from trade can be twice as high as the gains calculated in trade-only models, while the gains from MP are slightly lower than the gains computed in MP-only models.

    • Rodrik, D. (2012) The Globalization Paradox: Why Global Markets, States, and Democracy Can’t Coexist. Oxford University Press (OUP Catalogue). Available at: Link.
      • Abstract

        For a century, economists have driven forward the cause of globalization in financial institutions, labour markets, and trade. Yet there have been consistent warning signs that a global economy and free trade might not always be advantageous. Where are the pressure points? What could be done about them? Dani Rodrik examines the back-story from its seventeenth-century origins through the milestones of the gold standard, the Bretton Woods Agreement, and the Washington Consensus, to the present day. Although economic globalization has enabled unprecedented levels of prosperity in advanced countries and has been a boon to hundreds of millions of poor workers in China and elsewhere in Asia, it is a concept that rests on shaky pillars, he contends. Its long-term sustainability is not a given. The heart of Rodrik’s argument is a fundamental ’trilemma’: that we cannot simultaneously pursue democracy, national self-determination, and economic globalization. Give too much power to governments, and you have protectionism. Give markets too much freedom, and you have an unstable world economy with little social and political support from those it is supposed to help. Rodrik argues for smart globalization, not maximum globalization.

    • Young, A. (1991) “Learning by Doing and the Dynamic Effects of International Trade,” The Quarterly Journal of Economics, 106(2), pp. 369–405. Available at: Link.
    • </ol>

Back to blog

Share and Discuss