2011-11-07

Lucas' View on Free Trade

Continued from the previous post, I would like to quote a couple of paragraphs from the Lucas' book on economic growth. In the introductory chapter, the author mentions the connection between international trade and economic growth, which illustrates his (and perhaps most economists') view on free trade. While this part is written as an introduction to Chapter 3 ("Making a Miracle"), his evocative illustration provides better economic understanding and insight  of free trade in general.  This could also contribute to the debate on free trade (especially, on TPP issues in Japan).

The most spectacular growth successes of the postwar world have been associated with growth in international trade. This is the single empirical generalization that strikes everyone who is trying to understand economic growth in the last 50 years. Countries like Japan, South Korea, Taiwan, Hong Kong, and Singapore began producing goods they had never made before and exporting them to the United States, successfully competing with American and European producers who had the advantages of decades of experience. At the other extreme, the Communist countries that cut themselves off from trade with the West stagnated, as did India and many Latin American economies that used tariff walls to protect inefficient domestic producers from outside competition. These observations seem to provide further confirmation of the usual economic arguments in favor of free trade, arguments that seem to me as true and as relevant now as they were when Hume an Smith first articulated them. 
But classis trade theory does not really help in understanding the connections between trade and growth that we see in the postwar period. One problem is that while some of the Asian successes - in Taiwan and Honk Kong - were associated with liberal trade policy, others - Japan, Korea, and Singapore - occurred in heavily managed environments, under policies that Smith would certainly have criticized as mercantilist. (I agree with Smith that the mercantilist economies would have hared even better without managed trade, but this view is obviously not a straightforward statement of the facts.) A second, more important, barrier to the application of the theory of gains-from-trade to postwar growth is that quantitative versions of the theory do not yield estimated benefits of tariff reduction that are of the right order of magnitude to account for the growth miracles. (...) These models support a compelling case for the importance of free trade. What they do not provide, though, is a theoretical link between free trade and economic growth that is both rapid and sustained.

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