On the Long Run Effects of Barriers to Trade

Abstract

We study the macroeconomic effects of international trade policy by integrating a Hecksher-Ohlin trade model into an optimal growth framework. The model predicts that an open economy will have higher factor productivity. Furthermore, under protectionist policies there may be "development traps," or additional steady state balanced paths with low income levels. Hence, the large cross-country differences in barriers to trade may explain part of the huge dispersion of per capita income observed across countries. The effects are quantified and we show that protectionist policies can explain a significant fraction of TFP differentials, and a very large portion of the long run income differentials, across countries.

Keywords: Barriers to trade, Cross-country income differences, development traps

JEL Classification: O40, F43, O41