Growing through trade in intermediate goods: the role of foreign growth and domestic tariffs
| DOI | http://doi.org/10.1111/sjpe.12169 |
| Date | 01 September 2018 |
| Published date | 01 September 2018 |
GROWING THROUGH TRADE IN
INTERMEDIATE GOODS: THE ROLE
OF FOREIGN GROWTH AND
DOMESTIC TARIFFS
Carmen D.
Alvarez-Albelo* , Antonio Manresa** and M
onica Pigem-Vigo**
ABSTRACT
We show that pure Ricardian trade can account for the empirical evidence that
domestic growth is more affected by foreign growth than by trade openness. To
do this, we develop a two-country model involving a backward economy that
exchanges intermediate goods with a faster growing country. We obtain three
main results regarding growth and welfare of the backward economy: (i) the
growth-enhancing comparative advantage is facilitated by faster foreign growth;
(ii) the growth rate may be negatively affected or unaffected by a domestic tar-
iff, while it is always positively impacted by foreign growth; and (iii) a domestic
tariff could be welfare-improving.
II
NTRODUCTION
Despite the profusion of studies on the connection between trade and eco-
nomic growth, no conclusive results have been obtained on this linkage (e.g.,
Rodr
ıguez and Rodrik, 2001; Singh, 2010). However, some empirical literature
indicates that domestic features are not the only ones playing a role, but also
foreign conditions. Indeed, the econometric findings in Arora and Vamvakidis
(2005) reveal that the growth rate of trading partners has a greater impact on
domestic growth than trade openness does. More specifically, they divided
countries into closed and open ones, according to Sachs and Warner’s (1995)
definition, and in both cases found that a country’s growth is positively
affected by their trading partners’ growth rates. While empirical studies have
found a positive linkage between domestic and foreign growth (e.g., Easterly,
2001; Arora and Vamvakidis, 2006, 2011; Calder
on et al., 2006), the findings
regarding the relationship between trade policy and growth are mixed (e.g.,
Rodr
ıguez and Rodrik, 2001; Yanikkaya, 2003; Clements and Williamson,
2004; Dejong and Ripoll, 2006; Madsen, 2009). Any explanation of these
empirical results needs an approach that focuses “on how much economic
*Universidad de La Laguna
**Universitat de Barcelona
Scottish Journal of Political Economy, DOI: 10.1111/sjpe.12169, Vol. 65, No. 4, September 2018
©2018 Scottish Economic Society.
414
conditions in trading partners matter for growth” (Arora and Vamvakidis,
2005, p. 27), as well as how much trade openness matters for growth.
In this paper, we adopt this approach to show that pure Ricardian trade
can account for the aforementioned empirical evidence. As argued by Yenok-
yan et al. (2014), a pure Ricardian approach is valuable for the study of the
trade-growth linkage, since the empirical results regarding the significance of
scale economies are mixed (e.g., Backus et al., 1992; Hanson and Xiang, 2004;
Head and Mayer, 2004), and international spillovers, though empirically rele-
vant (e.g., Liu and Buck, 2007; Keller, 2010), cannot be considered as a trade
mechanism.
Thus, this paper builds on Ventura’s (1997) model and develops a theoretical
framework with two technologically different countries: a backward economy
(country B) that may boost its growth rate simply by exchanging intermediate
goods with a faster growing country (country P). It should be highlighted that
our model considers trade in intermediate goods because it represents the lar-
gest share of world trade flows and also has a greater productivity impact than
trade in final goods. Indeed, as reported by Miroudot et al. (2009, p. 48), for
OECD countries, trade in intermediate inputs represents 56.2% (in 2006) and
73.19% (in 2005) of trade flows of goods and services, respectively.
1
Moreover,
empirical evidence by Amiti and Konings (2007) shows that the productivity
gains from reducing tariffs on intermediate goods are at least twice as high as
the gains from reducing tariffs on final goods. These authors state that the
access to cheaper intermediate inputs in international markets can raise pro-
ductivity via variety, quality, and learning effects.
In our model, we assume that country Pgrows at an exogenous rate, while
for country Btrade becomes the only possibility of achieving faster growth in
the long-run by boosting investment in physical capital. Thus, our framework
captures the empirical result that trade affects growth mainly via capital
investment (e.g., Levine and Renelt, 1992; Baldwin and Seghezza, 1996; Wac-
ziarg, 2001; Wacziarg and Welch, 2008). In this context, we consider an
import tariff established by country Bthat can never be growth-enhancing. In
the theoretical literature on this topic, the positive relationship between tariffs
and growth relies on scale economies and international spillovers (e.g., Gross-
man and Helpman, 1990; Rivera-Batiz and Romer, 1991; Lee, 2011).
Countries Band Pproduce a non-traded final good with two traded inter-
mediate inputs, goods xand z. In the same vein as Yenokyan et al. (2014),
final good technologies in countries may differ in input shares, reflecting dif-
ferent input intensities. This assumption allows any growth outcome in coun-
try B, ranging from autarky growth to convergence in growth rate with the
trading partner. The production of intermediate goods uses capital and labor.
In sector x, there is exogenous labor-augmenting technological progress, with
productivity gains being greater in country Pthan in country B.
2
The
1
The figures for the emerging economies of Brazil, China, and India are 72.7% and
67.14%, 75.3% and 86.99%, 79.5% and 47.85%, respectively.
2
Empirical evidence has documented differences in sectoral total factor productivity
between countries (e.g., Fadinger and Fleiss, 2011).
GROWING THROUGH TRADE IN INTERMEDIATE GOODS 415
Scottish Journal of Political Economy
©2018 Scottish Economic Society
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