Working Paper: NBER ID: w19951
Authors: Nicholas Bloom; Paul M. Romer; Stephen J. Terry; John Van Reenen
Abstract: In a general equilibrium product-cycle model, lower trade barriers increase Southern purchasing power, which lifts long-run growth by increasing the profit from innovation. In the short run, factors of production must be reallocated inside firms, which lowers the opportunity cost of innovation, generating an additional trapped factor effect. Starting from a baseline OECD growth rate of 2% we find that trade integration with low-wage countries in the decade around China's WTO accession could have increased long-run growth to 2.4%. There is an additional short-run trapped factors effect, raising growth to 2.7%. China accounts for about half of these growth increases.
Keywords: Trade; Innovation; Growth; China; OECD
JEL Codes: E0
Edges that are evidenced by causal inference methods are in orange, and the rest are in light blue.
| Cause | Effect |
|---|---|
| Lower trade barriers (F19) | Increase in purchasing power in southern economies (N16) |
| Increase in purchasing power in southern economies (N16) | Raise long-run growth (O49) |
| Trade integration with low-wage countries (F15) | Increase in OECD’s long-run growth rate (O49) |
| Trapped factors effect (F16) | Raise growth to 2.7% in the short run (O49) |
| Increase in trade (F19) | Reallocation of production factors within firms (D21) |
| Reallocation of production factors within firms (D21) | Reduce opportunity cost of innovation (O36) |
| Reduce opportunity cost of innovation (O36) | Drive firms to invest more in developing new products (O49) |
| Increased competition from Chinese imports (F69) | Greater innovation activities in European firms (O31) |
| Trapped factors effect (F16) | Additional 0.3% to the growth rate (O49) |
| Increase in the rate of growth from trade with the south (N11) | Welfare effect equivalent to a 16% increase in consumption (D69) |