Trade, Foreign Investment, and Industrial Policy for Developing Countries 4095

4.4 Identifying the mechanisms for gains from trade

Much of the new research evaluates the importance of international trade for growth
using micromodels of consumer and firm behavior. This new research focuses on the
following mechanisms for understanding the linkages between openness to trade and
growth: (1) gains from consumption of increased variety (2) gains from importing
goods that embody new technology (3) gains from increasing competition (4) gains
from reaping economies of scale (5) gains through reallocation of market shares to
the most productive firms, and (6) learning by doing through exporting. We describe
these in more detail below.
Gains from consumption of increased variety. Quantitative models are useful for measur-
ing gains from trade coming from increased variety, as in Romer (1994). Feenstra
(1994) and Romer showed that these gains could be large, while Arkolakis, Demidova,
Klenow, and Rodrı́guez-Clare (2008) show that Romer’s results are sensitive to mod-
eling assumptions. Under heterogeneity, gains could be small, as the new varieties that
are imported after liberalization are “marginal varieties,” in the sense that total con-
sumption of these goods is small. Moreover, the benefits from the increase in foreign
varieties could be compensated by the losses associated with the displacement of
domestic varieties. Another important paper in this literature is Broda and Weinstein
(2006). Broda and Weinstein show that an important part of growth comes from the
increase in imported variety over the last several decades. While this may in part result
from a country’s own trade reforms, it is also driven by diversification on the part of
exporting countries like China.
Gains from importing goods that embody new technology. Eaton and Kortum (1999)
argue that tariffs affect the price of capital, and through this they affect the capital-
labor ratio in steady state. Coe and Helpman (1995), Keller (1998), and others
reviewed in Keller (2004) study the role of trade as a vehicle for “international
R&D spillovers.” The idea is that by importing intermediate and capital goods, a
country benefits from the R&D done in the exporting countries. This is a key feature
of the model of R&D and trade in Eaton and Kortum (2001). A different notion is
that trade accelerates the international flow of technical know-how (see Grossman
and Helpman, p. 165). Several papers have explored this empirically with mixed
results (see Aitken et. al., 1997; Bernard and Jensen, 1999; Clerides et. al., 1998;
Rhee & Belot, 1990).
A number of theoretical papers have explored the role of intermediate inputs in
raising productivity growth (Ethier, 1982; Grossman & Helpman, 1991; Markusen,
1989; Romer, 1986, 1990). Some recent studies find that increasing intermediate
goods inputs or lowering input tariffs are associated with large productivity gains.
This includes Amiti and Konings (2005), Broda, Greenfield, and Weinstein (2006),