Lesson 11

Economic Growth and Trade: Lesson 11 Overview

Introduction

  • Economic growth in relation to international trade is a key theme in macroeconomics.
  • Real world connections: Growth in output is often correlated with growth in the volume of international trade.
  • Trade growth can stem from both exports and imports, highlighting interdependencies in global markets.

Key Relationship Between Economic Growth and International Trade

  • Output Growth:
    • Trade growth is closely associated with growth in output.
    • Example: Japan demonstrates high output but low trade volume.
    • Not necessary for wealth to correlate with higher trade volume; some nations, like Japan, maintain wealth with moderate international trade.
  • Trade Dynamics:
    • East Asia's trade (notably China and Korea) has expanded significantly in both exports and imports.
    • Implication: The balance of imports and exports plays a crucial role in enriching economies.

The Role of Trade in Productivity and Economic Growth

  • Major Channels of Impact:
    1. Multinational Firms (MNF):
      • Foster productivity through foreign direct investment (FDI) spillovers.
    2. Trade Liberalization:
      • It involves lowering import barriers, affecting competition and productivity.

Import Barriers and Firm Productivity

  • Types of Import Barriers:
    1. Tariffs on Final Consumption Goods (Output Tariffs)
    2. Tariffs on Intermediate Goods (Input Tariffs)

Effects of Reducing Import Barriers

  • Tariff Reductions & Competitive Dynamics:
    • Foreign competition increases leading to reduced market share for domestic firms.
    • The least productive firms are likely to exit, resulting in a
    • Aggregate Productivity Impact:
    1. Selection Effect: The exit of less productive firms.
    2. Within-firm Improvements: Remaining firms must innovate and upgrade due to increased competition.

Understanding FDI Spillovers

  • Foreign Direct Investment (FDI) Spillovers:
    • Multinational firms create performance premiums for local/domestic firms through various channels, primarily through technology transfer and competition.
  • Key Findings from Studies:
    • FDI leads to significant productivity benefits for domestic firms. A clear relationship exists between high-tech sectors and productivity gains.
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  • Key empirical study (Keller and Yeaple, 2009):
    • Evidence shows that multinationals contribute economically to U.S. productivity through both direct effects and spillover effects, primarily within manufacturing firms during the period from 1987 to 1996.

Methodological Approach to Assessing FDI and Import Spillovers

  • Estimating Using First-Difference:
    ext{TFP}{ijt} = eta1 ext{FDI}{jt} + eta2 ext{Imports}_{jt} + ext{ noise}
  • Variables Clarified:
    • extFDIjtext{FDI}_{jt}: Represents the share of employment by foreign-owned affiliates and U.S. firms in industry j related to firm i.
    • extImportsjtext{Imports}_{jt}: Represents U.S. imports as a share of total industry shipments.

Tables and Empirical Results

  • Estimation Results (OLS with Differences):
    • Analysis of variables such as R&D, Market Share, and Margins suggest overall productivity increases in reaction to foreign market activities.
    • For instance, as shown in Table 4, FDI impacts are significant (p < 0.05) across multiple years and conditions.

Impacts of Trade Liberalization

  • Final Goods Tariffs:

    • Reduction leads to heightened competition, with crucial repercussions on productivity.
    • Effectiveness gauged through substantial productivity elevations as a consequence of reliance on imported advanced input technologies.

  • Intermediate Goods Tariffs Effects:

    1. Foreign technology transfer: Firms increase productivity by importing advanced technologies.
    2. Variety Effects: Increased variety leads to improved efficiency.
    3. Quality Channel: Accessing high-quality inputs enhances overall production quality, especially in developing economies.
    4. Cost Effect: Firms can lower their marginal production costs by sourcing affordable intermediate inputs from abroad.

Case Study: Indonesia as a Research Context

  • Objectives:
    • To delineate the productivity impacts from reductions in both output and input tariffs using data from Indonesian manufacturing.
    • The analysis utilized plant-level census data from 1991 to 2001.
  • Findings:
    1. A 10 percentage point reduction in input tariffs equates to a 12% productivity increase for importing firms.
    2. Conversely, the output (final goods) tariffs reduction impacts productivity less dramatically, resulting in a 5% increase for a similar tariff cut.

Summary of Findings on Selection Effects in Exporting

  • Dual Causality Influence:
    1. More productive firms are predisposed to export.
    2. Engaging in export activities provides an efficiency boost through improved linkages and competitive strategies, collectively termed “Learning by Exporting.”
  • Literature Findings:
    • Both self-selection into export markets and learning-based productivity improvements can significantly drive productivity growth in firms engaged in international trade.