Does trade reform promote economic growth?

Do trade reforms that significantly reduce import barriers lead to faster economic growth? In the two decades since Rodríguez and Rodrik’s (2000) critical survey of empirical work on this question, new research has tried to overcome the various methodological problems that have plagued previous attempts to provide a convincing answer. This paper examines three strands of recent work on this issue: cross-country regressions focusing on within-country growth, synthetic control methods on specific reform episodes, and empirical country studies looking at the channels through which lower trade barriers may increase productivity. A consistent finding is that trade reforms have a positive impact on economic growth, on average, although the effect is heterogeneous across countries. Overall, these research findings should temper some of the previous agnosticism about the empirical link between trade reform and economic performance.

That is the abstract to the new NBER working paper from Douglas Irwin, self-recommending.

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More imports should help economic growth through competition—domestic businesses and workers will have to improve their productivity and skills to compete with foreign businesses and workers.

In developing countries, more imports also have the added benefit of facilitating tech transfer as local people tinker with products and learn more about how they are made and how business is done.

>>domestic businesses and workers will have to improve their productivity and skills to compete with foreign businesses and workers.<<

That is not what happens. In books maybe, but in real life they fall behind, then drop out of the market altogether. Then they vote in their frustrations.

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"the effect is heterogeneous across countries" I suppose that means it depends. Studies have shown that developing countries can jump-start industry with trade restrictions. After all, what industry does a developing country have to protect? Of course, what's happened in the past 40 years is that firms in developed countries have shifted industrial production to developing countries, so it's the developed countries that are adopting trade restrictions to protect industrial production from competition from developing countries. In times past, trade restrictions were adopted as defensive reactions to trade restrictions adopted by other developed countries. Developing countries kept in their place, producing raw materials for industrial production in developed countries. The shift has been enormous, and developed countries don't yet know how to deal with it, economically, politically, or socially. A good start would be to acknowledge that firms in developed countries elected to shift production to developing countries. Nobody pointed a gun at their heads. Does one blame China because Apple shifted production to China?

+1 Multi-nationals say: " Protect me from myself and my past decisions"

When companies go abroad and establish plants in countries conditioned upon them taking local partners, or transferring technology, they are quite aware of the risks. Particularly when they can see all around them instances of intellectual property trade theft (at its worse) or simply copying the outline of the plant floor and lining up the same domestic suppliers as the foreign entrant.

So, what we really have now is business coming back and saying: We want to invest more in that country, but we are concerned that transferring even more technology will hurt us, or we may lose it, or we really want to establish shop in China but....

I had a friend who became the General Counsel of a high tech company and spent two years in China. He came back; 1 year later they started seeing copy cats.

I think the real question to be asked is of the management of Multi-nationals on the silent sale or disposition of their businesses and whether they were prudent in the selection of partners and the countries they chose to set up shop in. If IP protection is weak, and you are at risk of losing IP assets, you don't go their, or you leave your significant IP containing components in another country and ship them in to the weak IP country were they are simply assembled. The real problem that many companies have is that they don't really have much significant IP in their products, and its a choice of missing out on an opportunity that a rival could pick up.

@Bill - it's game theory: if you don't make your patented product in China, your competitor will make their non-patented substitute in China for a lot less. Most of the time, people buy the cheapest good around, not necessarily the best (patented) good around.

As for Rayward's point, I am also suspicious of the phrase "although the effect is heterogeneous across countries" - isn't free trade always and everywhere an unalloyed good thing? Or is it one of these spray can plots where the regression line shows R-squared to be 0.30? (weak but still significant statistical correlation)?

That's what I said. But, I also think that basically companies have been divesting their future without telling the shareholders. It's a little late to come back and pull the fat out of the fire for the multi-nationals who would invest even more if there were better IP protection. Bottom line is that the fight over IP today is a fight over the future of placing more IP in China via more plant relocations.

I think the premise for some of this wishful thinking was that there was growth in China and no growth in their own domestic markets.

Look for a trade agreement that gives protection for movies, weak protection for industrial IP (you still have to use the national courts) and a big win for the financial services industry which will be able to tap the pool of chinese savings to be placed in other financial instruments.

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She had deep lines on her forehead and round cheeks and the creases between her eyes and cheeks were plumed. Her eyebrows raised in a split-second for a glimmer. “I used to know this lifeguard,” she said.
“Yeah?” I laughed.
“Look, your friends, I just can’t find them humorous and spell anathema with my hands.”.
“Hey Jeanine, two more, on the rocks,” they called.
She got up and went behind the bar, pulled out a bottle of Absolute and the ice scooper, remade their vodka tonics and one for herself with a cherry. When she came back, she turned the chair around. “The thing about the lifeguard was that someone broke into her locker.” Jeanine drank from her glass as if it was water. She sucked on an ice cube and bit with her molars.
“Oh,” I said.
“Only nothing was stolen except the lock.”
I could see small pieces of ice on her tongue. “So?”
“She stares at the mirror and her reflection is totally blank. She sees her first reaction in the mirror. Then she turns to the open locker and at the end it’s black as a shadow.”
“Yeah?”
“’Only a shadow’s not black. Ever laugh at a nightmare?’ she asks me. Well have you?”
“I don’t think first thing. Over time.”
“Still. There’s patterns, and there’s intuition. And this lifeguard makes peach cobbler, which we’re eating. ‘In a recipe you might think you go with your intuition, but you go with the measurements,’ she says.”
“Like the American flag,” I said.
“An, an American flag.”

Watching Woods unburden himself last Friday made me think: This really shouldn’t be any of my business. I’ve never had the same thought watching John Edwards confess his sins. Athletes and actors don’t work for us directly; they’re entrusted with great wealth and fame, but not great power. But the private peccadilloes of politicians tend to interfere with, and corrupt, their commission of their public duties.

https://www.nytimes.com/2010/02/21/opinion/22douthat.html

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In other news, TX Gov. Abbott signed a law making legal kids' lemonade stands.

Surprised that guy is in favor of anything that stands.

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TX Republicans like Abbott are doing real hard work passing bathroom laws.

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Yes it does. And the benefits are just large enough that you can demonstrate them with the most meticulously compiled datasets stewed through SAS. Just.

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If it had the exact same methodology, but results went the other way, would it still be self recommending? Would it even have been published on MR?

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The NBER abstract reads as if the authors made every effort possible to prove their point.

Which begs the question, what if the author's intent had been to disprove the idea that "trade reform" (how defined?) leads to faster economic growth?

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Everyone wants protectionism for themselves. Policies should be based on reality, not on what we want other people to do (usually against their self-interest, as they see it).
Or as Roberto Wohlsteter suggested (in Warning and Decision), we'd love to know what the enemy plans to do, but since we can't, we have to make our plans without knowing. Or in this case, how great would it be if everyone agreed with us? But since they aren't going to, we need plans that work (however defined) without their agreement.

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Or, as Mancur Olson recommended, free trade is better than no free trade, no matter whether trade partners, rivals etc., reciprocate or not. But then you have to convince your voters who are being adversely impacted. As the recent USA election indicates, that might not be easy. Therefore, as above, settle for a policy that works (as well as it can) regardless what the voters decide.
Or as Olson also said, the fact that things are bad doesn't mean they can't get worse (not literally exactly what he said, but the idea is similar). So sometimes, after the rain comes the flood, not blue skies.
The bright side is that at least legal genocide against blastocytes will cease in some parts of the American Deep South.

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