Working Paper: NBER ID: w29500
Authors: David Atkin; Arnaud Costinot; Masao Fukui
Abstract: We study the relationship between international trade and development in a model where countries differ in their capability, goods differ in their complexity, and capability growth is a function of a country’s pattern of specialization. Theoretically, we show that it is possible for international trade to increase capability growth in all countries and, in turn, to push all countries up the development ladder. This occurs because: (i) the average complexity of a country’s industry mix raises its capability growth, and (ii) foreign competition is tougher in less complex sectors for all countries. Empirically, we provide causal evidence consistent with (i) using the entry of countries into the World Trade Organization as an instrumental variable for other countries’ patterns of specialization. The opposite of (ii), however, appears to hold in the data. Through the lens of our model, these two empirical observations imply dynamic welfare losses from trade that are small for the median country, but pervasive and large among a number of African countries.
Keywords: international trade; development; capability growth; complexity; WTO
JEL Codes: F10; F04
Edges that are evidenced by causal inference methods are in orange, and the rest are in light blue.
| Cause | Effect |
|---|---|
| International trade (F19) | capability growth (D25) |
| Average complexity of a country's industry mix (F12) | capability growth (D25) |
| Foreign competition in less complex sectors (L19) | specialization in more complex goods (F12) |
| International trade (F19) | dynamic welfare losses (D69) |