Introduction: Trade can affect growth

Example: The Green Revolution◦ The process of technological development of

agricultural techniques that began in the northern Mexican state of Sonora in 1944 It has since spread throughout the world.

◦Goal: to increase the efficiency of agricultural processes so that the productivity of the crops increased, and to help developing countries face their growing populations' needs. Technologies fell into two major categories One side effect of the Green Revolution

Some net food importing countries became net food exporting countries

Introduction: Role of new technology

Economic Growth ⇒ Trade But also Trade ⇒ Economic growth We have seen again and again how there are gains from trade

◦ But not everyone believes it◦ Many countries still fear that a reduction in trade barriers

will be harmful 1950-1960s: many developing countries persued inward

oriented policies of import substitution Fear also stemmed from beliefs that the prices of primary

products were too low and they could not compete with developed country levels of protection

Fair claim Question: what are the effects of economic growth

on trade?

Introduction: Trade affects growth

A better distinction may be to talk about problems faced by “primary product” exporters◦ Countries that export primarily ‘primary

products’ (agriculture and natural resources) as opposed to manufactured goods.

Problems faced by primary product exporters

1st Problem: Volatility of export earnings◦ export earnings on these goods may be more

vulnerable to changes in international prices.

Problems faced by primary product exporters

Price volatility can necessarily mean that export earnings are going to be a problem.

Why?◦ Effect on standard of living.◦ Countries are more likely to reduce their investment.

This has impacts on long run growth◦ Impacts on their import purchasing power.◦ Volatility in key prices is especially critical

Problems faced by primary product exporters

2nd Problem: Curse of natural resources: The resource curse is a theory that an abundance of

easily obtainable natural resources may in fact encourage internal political corruption, underinvestment in domestic human capital, and a decline in the competitiveness of other economic sectors, thereby actually hurting prospects for growth and democratization. ◦ Countries who suffer from this condition may be classified

as rentier states rentier state is a state that derives all or a substantial

portion of their national revenues from the rent of indigenous resources to external clients.

revenues from natural resources (commonly state-owned) are already substantial.

Problems faced by primary product exporters

What to do?◦International commodity stabilization

programs◦Commodity futures markets

Problem: futures markets don’t exist for all commodities

◦Product diversification

Problems faced by primary product exporters

3rd Problem: deteriorating terms of trade◦ What is worse than price volatility? Price decline

Problems faced by primary product exporters

Policies pursued by developing countries◦Many primary product exporters pursed

policies of import substitution◦Free-trade zones◦Export lead growth

Problems faced by primary product exporters

HO says differences in factor endowments (but same technology)

But what about country differences in production technology? ◦ Technical differences can skew production toward products

in which the country has a relatively better technology. ◦ Countries experience technological change – but at

different times and rates and sectors.

  Where does technology come from? Mostly

through organized efforts called R&D. This technology can be spread internationally

through trade: Diffusion

Technology and Trade

Technology and Trade: The Product Cycle

Start: Imitation Lag Hypothesis (M.V. Posner,1960) Relax assumption of HO of same technology

◦ Two countries: US, China◦ Suppose US invents a new product◦ Imitation lag: product will not be produced immediately by

firms in China 1st: Needs to acquire the knowledge & know-how to produce the

product 2nd: Needs to purchase new inputs, install equipment and bring

the product to market

◦ Demand lag: product may not be accepted immediately in China Consumers will take time to substitute from old version to new

version of product

◦ Net lag: Imitation-demand lag=time US has to export to China

Technology and Trade: The Product Cycle

The Product Cycle builds on Imitation Lag Hypothesis (Raymond Vernon, 1966)

◦ Relax more assumptions of HO◦ Concerned with the life cycle of a typical new

manufacturing product. Hypothesis: new products pass through a series

of stages in the course of their development

◦ Comparative advantage of producers in innovating countries will change as the product moves through this cycle.

◦ 4 product life cycles depict innovative country trade position

Technology and Trade: The Product Cycle

1. Product development and sale in the innovative country’s market• “New Product Stage”

• Locating production close to buyers

• No international trade takes place

Technology and Trade: The Product Cycle

2. Growth in innovative country’s exports as foreign demand is cultivated

◦ “maturing product stage”

◦ General standards for the product emerge

◦ Mass production techniques are beginning to be adopted

◦ Economies of scale start to be realized

◦ Foreign demand is driven from other developed countries

◦ Innovative country begins to export

Technology and Trade: The Product Cycle

3. Decline in innovating country exports as foreign production abroad begins to serve foreign markets

◦ “standardized product stage”◦ Foreign demand growth warrants

production in the foreign markets◦ Product has become more standardized◦ Shift from a high skill intensive product to

a low skill intensive product◦ Production may shift to developing

countries◦ Innovating country exports decline

Technology and Trade: The Product Cycle

4. Innovative country becomes a net importer as foreign prices fall

◦ The pattern of trade switches, in part due to differences in labor costs

◦ US applies their abundant high skilled labor toward innovative products and imports low the final good now produced with low skilled labor

Factor endowments and factor prices still play a role

Openness to trade affects growth

Closed trade ⇒ can cut itself off from technological diffusion.

Trade provides access to new and improved products.

Openness to trade can also have an impact on the incentive to innovate.

Trade can provide additional competitive pressure on the country’s firms.

Trade provides a larger market