Day 3: Framework Session – The Gains from Trade

Chaired by Erik Verhoogen (Research Programme Director, IGC Firms Programme; Associate Professor of International and Public Affairs and Economics, Columbia University) and Richard Newfarmer (Country Director, IGC Rwanda, South Sudan and Uganda) , this Framework Session aimed to lay out the research landscape on Trade Gains.

Andrés Rodriguez-Clare started the session outlining the three most pressing questions in the field of Trade and Growth:

  1. Does trade openness increase growth?
  2. Under which conditions does trade fosters growth, and how can these gains be measured?
  3. And finally, what is the role of public policies?

As a matter of fact, much still needs to be learnt about the impact of trade on growth. For example, trade seems to be correlated with growth, and this evidence is stronger in countries that have adopted open market policies. Recent empirical work has identified the causal relationship as to be going from trade to growth, but the former seems also to be correlated with higher poverty. Hence, there is a strong need for more research into policies to better harness gains from trade.

Moreover, while researchers have managed to clearly identify this causal impact, more work is needed in order to understand the nature of this link. Interesting research has analysed how trade openness allows firms to access better and higher quality inputs, better technologies and how trade provides incentives for learning and production upgrading. How to foster this process, however, is a policy question that still offers many research opportunities.

Central to the debate on Trade Gains are the obstacles that firms face in trading both internationally and domestically. For example, the US gains from internal trade have been estimated in the range of 30%, but this figure would drop to 10% if the US trade costs were comparable to Ethiopia and Nigeria. This issue is particularly relevant in many developing countries as they often record significantly lower trade flows than what economic models would predict. Identifying and tackling the source of these trade barriers could potentially have a large impact in reducing income disparities between countries.

Melise Jaud (World Bank) took the podium next to present her work on export “Big Hits”. This term came to describe those episodes of rapid export surge of products new to a country’s export basket. Trade statistics show many of these episodes around the world, from bananas in Uganda to cut flowers in Kenya, but little is known about the origin of these export successes. Jaud’s results show that Big Hits induce growth in the number of firms, increase employment and stimulate a learning process conducive to future export success. However, little is known about the role that policy can play in the process. As a matter of facts, these episodes are not correlated to demand nor supply shocks and seem to be determined by country-product matching dynamics. How to foster this process is a question on which the research agenda should focus in future.

The two discussants, Hon. Minister Axel Addy (Minister of Commerce and Industry, Liberia) and Rukhsana Shah (Secretary, Ministry of Textile Industry, Government of Pakistan), laid out an interesting debate from their own countries’ experience. Using the words of Andrés Rodriguez-Clare, what is important for policy-makers is not “creating comparative advantage, but it is taking advantage of existing comparative advantage by mobilising resources”, referring, for example, to Human Capital and Infrastructure.

By Andrea Smurra, Country Economist, IGC Myanmar