Federico Steinberg

Trade, growth and development

Theory, empirical evidence and development strategies

Outline1. The present trading context2. The logic of trade liberalization3. The political economy of trade policy4. The arguments for protection5. The empirical evidence: what do we know?6. Some historical lessons7. What should emerging economies do?

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The present trading context • Wide spread retoric of virtues of trade openness fostered

by multilateral institutions:– IMF / World Bank:

• Washington Consensus policies (ie. structural adjustment plans that include trade liberalization)

• “The globalizers” grow faster (SE Asia, China, India, etc)

– WTO:• Strong pressures by “the north” for liberalization and harmonization of

national standards• New topics on the trade agenda (“trade-related issues”) • But Doha negotiations collapsed

– Rise of new regionalism due to WTO impasse • Rise of new FTA

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Average applied tariffs (2009)

Developed countries

Developing countries

Agriculture 16 % 17,7 %

Textiles 7,5 % 17 %

Manufactures 1,9 % 9 %

Total (excluding services)

2,9 % 9,9 %

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Free trade is good because it…– Increases economic efficiency– Reduces consumers prices– Allows to reap the benefits of economies of scale and

increases product variety– Promotes competition – Speeds up technological transferIncreases welfare and promotes growth– Non economic arguments:

• Reduces rent-seeking activities (corruption) • Political stability

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The political economy of trade policy

• Trade liberalization redistributes income (Stolper-Samuelson theorem). With liberalization:– Owners of the relatively scarce factors of production lose– Owners of the relatively abundant factors of production win

• Examples:– In China unskilled labor is relatively abundant wages

increase with trade liberalization– In Europe, low skilled labor is relatively scarce wages

decrease with trade liberalization

• Income redistribution through trade policy is economically inefficient and not transparent

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Arguments for protection• Infant industry protection (Mill, Hamilton, List):

– Latecomers are not able to compete on a level playing field with advanced/industrialized countries: they need temporary protection

– Critics: trade protection is not the best policy to solve this problem• Strategic trade policy/picking winners:

– On strategic sectors with high profits and positive externalities it is justified to “protect” (subsidies, R&D)

– Critique: how do you pick those sectors?• Historical argument: most rich countries were protectionist• Non-economic argument: security concerns, “high politics”

• Other (mostly incorrect) arguments: terms of trade, job protection, Balance of Payments deficits,…

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Empirical evidence: what do we know?

• Rich countries tend have relatively open trade policies (excluding agriculture)

• So, does openness cause growth?

?

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Trade liberalization

Economic growth

First problem: which variable is more important for growth? Impossible to discern

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Trade liberalization

Economic growth

Financial liberalization

Exchange rate policy

Good institutions/regulation

Macroeconomic stability

…

…

Poverty reduction

Second problem

• In practice it is very difficult to measure protectionism

• Tariffs are easy to compute• But protectionism includes:

– Non-tariff barriers– Subsidies– Regulatory barriers– …

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Empirical evidence: what do we know?

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The most relevant econometric studies (Edwards 1998, Rodrik and Rodriguez 2000, Winters 2004, …) show that:

• It is not possible to establish a clear causal relationship between openness and growth

• Over long periods of time, open economies tend to grow faster (dynamic gains from trade)

• Very closed economies grow very slowly (lack of technology and competition, ex: North Korea)

• Strategic trade liberalization, combined with other sound policies (macro, institutional, etc), accelerates growth (but trade liberalization is not enough)

• Once a country has developed, it tends to increase trade liberalization (so maybe growth causes openness)

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Thus, we can conclude that:

Some historical lessons• United Kingdom: successful unilateral trade liberalization

(1846), but it was a hegemonic power• Germany and USA (XIX century): used protectionism to

promote industry and manufactures• Japan (1950s-1960s), South Korea (1960s-1970s) and

other South East Asian countries: developed with protection and active industrial policies to promote exports in strategic sectors

• China and India: gradualism, selective protection and control over FDI

• Is import substitution dead?

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What should emerging economies do?• Integrate strategically in the global economy following

its comparative advantage• Maintain “policy space” (industrial policy, IPR, FDI

regulation, credit allocation to key sectors, etc)• Reject new trade issues that reduce political autonomy

(Singapore issues, environment, labor)• Foster multilateral, rules-based integration• Regional/bilateral treaties only when political

autonomy is not reduced (avoid asymmetries)

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