Working Paper: CEPR ID: DP1331
Authors: Richard E. Baldwin; Elena Seghezza
Abstract: Many studies have found a positive correlation between trade and growth, but do not attempt to identify the economic mechanisms involved. This paper attempts to identify one of the mechanisms linking trade and growth. In particular, we present a novel theoretical model that establishes a link between trade liberalization and investment-led growth. Estimating equations are derived from the model and estimated with three-stage least squares on a cross-country data sample. We find that domestic protection depresses investment and thereby slows growth. Foreign trade barriers also lower domestic investment, but the anti-investment effect is weaker and is less robust to sample and specification changes.
Keywords: trade and growth; investment-led growth
JEL Codes: F10; F43
Edges that are evidenced by causal inference methods are in orange, and the rest are in light blue.
| Cause | Effect |
|---|---|
| Domestic protection (D18) | Investment (G31) |
| Investment (G31) | Economic growth (O49) |
| Domestic protection (D18) | Economic growth (O49) |
| Foreign trade barriers (F14) | Investment (G31) |
| Foreign trade barriers (F14) | Economic growth (O49) |
| Domestic protection raises cost of new capital goods (D24) | Investment (G31) |