Reexamining the benefits of free trade

by on August 22, 2008 at 4:40 am in Economics | Permalink

I have yet to read this paper, by Antoni Estevadeordal and Alan M. Taylor, but it appears to be of considerable interest for recent debates on free trade.  The main argument is that trade really does raise growth rates by a noticeable amount:

According to the Washington Consensus, developing countries` growth would benefit from a reduction in tariffs and other barriers to trade. But a backlash against this view now suggests that trade policies have little or no impact on growth. If "getting policies right" is wrong or infeasible, this leaves only the more tenuous objective of "getting institutions right" (Easterly 2005, Rodrik 2006). However, the empirical basis for judging recent trade reforms is weak. Econometrics are mostly ad hoc; results are typically not judged against models; trade policies are poorly measured (or not measured at all, as when trade volumes are spuriously used); and the most influential studies in the literature are based on pre-1990 experience (which predates the "Great Liberalization" in developing countries which followed the GATT Uruguay Round). We address all of these concerns — by using a model-based analysis which highlights tariffs on capital and intermediate goods; by compiling new disaggregated tariff measures to empirically test the model; and by employing a treatment-and-control empirical analysis of pre- versus post-1990 performance of liberalizing and nonliberalizing countries. We find evidence that a specific treatment, liberalizing tariffs on imported capital and intermediate goods, did lead to faster GDP growth, and by a margin consistent with theory (about 1 percentage point per annum). Endogeneity problems are considered and other observations are consistent with the proposed mechanism: changes to other tariffs, e.g. on consumption goods, though collinear with general tariffs reforms, are more weakly correlated with growth outcomes; and the treatment and control groups display different behavior of investment prices and quantities, and capital flows.

Here is a non-gated version, though it is more than a year older.  If there is any piece that can get Dani Rodrik blogging again, this is it.

Addendum: New updated, ungated version.

1 Nate August 22, 2008 at 11:58 am

Surely this time it will convince the skeptics.

2 WiseMonkey August 23, 2008 at 1:15 pm

Doesn’t convince me.

Why should tariff policy be any less endogenous than trade-openness?

Countries that are doing well may choose to open borders. It just doesn’t follow that opening borders means that countries will do well.

3 EarthTone August 24, 2008 at 2:48 pm

Let’s assume for the moment that liberalized trade does lead to higher economic growth. The next question, and a vital one is, does that equally benefit all segments of society, and how?

The most common concerns I hear about free trade do not revolve around economic growth. What I hear are complaints that the benefits of this growth disproportionately favor the upper income classes, and do not trickle down to the greater population.

To all free traders: if you want to convince people of the righteousness of your cause, prove that there is a real benefit from free trade for the bottom 60-70% of income earners. Right now, I believe that the common perception is that free trade harms rather than helps that (majority of the US) population.

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5 tom May 14, 2009 at 9:21 pm

Everything is decided by the market instead of any single human being’s personal feeling.
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