Scope of the Chapter

This chapter discusses the relationship between trade and economic growth, arguments for and against tariff protection, the shift in LDCs' terms of trade, import substitution and export expansion in industry, DC import policies, expansion of primary export earnings, trade in services, protection of intellectual property rights, foreign exchange-rate policies, LDC regional integration, global production networks (the borderless economies), and protection of infant entrepreneurship.

Does Trade Cause Growth?

In the long run, liberal international trade is a source of growth (Sachs and Warner 1997; Baldwin 2003). Is the high correlation between trade and GDP per capita a result of income causing trade or trade causing growth? Jeffrey A. Frankel and David Romer (1999:379–399) test the direction of causation by constructing a measure of trade based on geographic characteristics rather than on income. They then use this measure to estimate the effect of trade, if any, on per capita income. They find that a 1-percentage-point increase in trade to GDP increases income per person by ½–2 percent. Trade mainly raises income by spurring the growth of productivity per input; in addition trade affects income by stimulating physical and human capital accumulation. Alan Winters (2004:F10–F15) attributes the productivity gains to increased import competition, technological improvements embodied in imports, export expansion, and learning through trade.

However, Greenaway, Morgan, and Wright (1997) show that, in the short run, trade liberalization by LDCs in the 1980s and 1990s was associated with deterioration in growth.