Scope of the Chapter

This chapter discusses the relationship between trade and economic growth, arguments for and against tariff protection, the shift in less-developed countries’ (LDCs’) terms of trade, import substitution and export expansion in industry, developed countries’ (DCs’) 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 the 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 gross domestic product (GDP) per capita a result of income causing trade or trade causing growth? Jeffrey Frankel and David Romer (1999:379–99) 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 0.5 to 2 percent. Trade raises income mainly 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.