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On the Output Effects of Barriers to Trade

We study the macroeconomic effects of international trade policy by integrating a Hecksher‐Ohlin trade model into an optimal-growth framework. The model predicts that a more open economy will have higher factor productivity. Furthermore, there is a “selective development trap” to which countries may or may not converge, depending on policy. Income at the development trap falls as trade barriers increase. Hence, cross-country differences in barriers to trade may help explain the dispersion of per capita income observed across countries. The effects are quantified, and we show that protectionism can explain a relevant fraction of TFP and long-run income differentials across countries. We study the effects of international trade policy on output. To do so, we analyze a standard neoclassical growth model, where countries can trade intermediate goods. The markets of these goods are structured as in the also-standard Hecksher‐ Ohlin trade model. Thus, trade happens owing to comparative advantage, which emerges from differences in factor endowments across countries. 2 We focus on the case of a small, price-taking economy. One can solve for equilibrium sequentially: first, each period’s output and trade can be treated as a static problem, and its solution can be summarized by a mapping from capital and labor to the output of the final good. Then, using that endogenous mapping as if it were an exogenous production function, one can solve the intertemporal decisions of agents in the economy. In that way, a potentially complex dynamic trade problem is avoided. It turns out that the equilibrium mapping linking inputs and final output is affected by tariffs, as the gains from trade impact not only welfare but also the availability and price of intermediate inputs, and hence productivity.