1. Federico Steinberg Trade, growth and development Theory, empirical evidence and development strategies

2. Outline 1.The present trading context 2.The logic of trade liberalization 3.The political economy of trade policy 4.The arguments for protection 5.The empirical evidence: what do we know? 6.Some historical lessons 7.What should emerging economies do? 2

3. 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 3

4. Average applied tariffs (2009) Developed countries Developing countries Agriculture16 %17,7 % Textiles7,5 %17 % Manufactures1,9 %9 % Total (excluding services) 2,9 %9,9 % 4

5. 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 transfer  Increases welfare and promotes growth – Non economic arguments: Reduces rent-seeking activities (corruption) Political stability 5

6. 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 6

7. 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,… 7

8. Empirical evidence: what do we know? Rich countries tend have relatively open trade policies (excluding agriculture) So, does openness cause growth? ? 8 Trade liberalization Economic growth

9. First problem: which variable is more important for growth? Impossible to discern 9 Trade liberalization Economic growth Financial liberalization Exchange rate policy Good institutions/regulation Macroeconomic stability … … Poverty reduction

10. 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 – … 10

11. Empirical evidence: what do we know? 11

12. 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) 12 Thus, we can conclude that:

13. 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? 13

14. 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) 14