Abstract
This article presents a Ricardian model of trade with learning-by-doing to study the effect of barriers to trade in products with low growth potential on the long-run economic growth. The model shows that, when elasticity of demand for the product with a lower learning potential is lower than unitary, a reduction in the tariff imposed on this product, may shift the demand toward the product with a higher learning potential, thus enhancing economic growth in the exporter economy. Therefore, the current trend of reduction in tariffs on agricultural exports not only generates a positive welfare effect in the short run, but may similarly be beneficial for developing economies in the long run, since it also increases their incentive to develop sectors with higher growth potential.
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Notes
See, however, Rodrik, Subrananian and Trebbi (2004) for a critical view.
For further evidence on protection levels in agriculture before the Uruguay Round Agreement see, for example, Josling (1993).
Thus, for example, while the World Bank’s Tariff Trade Restrictiveness Index (TTRI) for 2007 for agricultural exports from low-income countries is slightly lower than 10 %, the corresponding Overall Trade Restrictiveness Index (OTRI) is slightly higher than 25 % (World Bank 2010). For the role of sanitary and phytosanitary requirements in developed countries as barriers to agricultural exports from developing countries see, for instance, Henson and Loader (2001). A broader analysis of the consequences of agricultural trade liberalization for developing countries can be found, for example, in Bureau et al. (2006).
With such pattern of comparative advantage, allowing for learning in the “foreign” sector in the less advanced economy will not generate additional insights.
Since an increase in the foreign demand for the semi-sophisticated product is the driving force behind this paper’s main result, an alternative assumption of learning-by-exporting in this sector will yield a qualitatively similar result.
For an analysis of the welfare implications of the distribution of tariff revenues see, for example, Galor (1994). Alogoskoufis (2014) shows that an economy that moves from autarky to openness will end up with a higher growth rate and a negative net external position if the world real interest rate is lower than its autarky equilibrium real interest rate.
Although, following Spilimbergo (2000), I adopt a Stone-Geary-type utility function, the same result could be obtained using any utility function with elasticity of substitution smaller than one.
Formally, this condition implies that technological progress in sector y in the home country sets the upper bound for the tariffs imposed on the good produced in sector x. Recent models with an endogenous emergence of comparative advantages can be found, for instance, in Fajgelbaum, Grossman and Helpman (2011) and Jaimovich and Merella (2011).
The steps to compute ω are:
$$ \gamma \left(1-{P}_{xt}^HX\right)=\left[1-\gamma \left(1-{P}_{xt}^FX\right)\right] f\omega \Rightarrow \gamma \left(1-{a}_x^HX\right)=\left[1-\gamma \left(1-\frac{a_x^H\left(1+\tau \right)}{\omega }X\right)\right] f\omega . $$Solving this equality for ω gives equation (19).
The total demand for y t is the sum of the demands in Home and in Foreign. The total demand for y t is:
$$ {y}_t^{H, tr}+{y}_t^{F, tr}=\frac{\beta }{P_{yt}^H}\left(1-{P}_{xt}^HX\right)+\frac{\beta }{P_{yt}^F}\left(1-{P}_{xt}^FX\right)f $$$$ =\frac{\beta }{a_{yt}^H}\left(1-{a}_x^HX\right)+\frac{\beta \omega}{a_{yt}^F}\left(1-\frac{a_x^H\left(1+\tau \right)}{\omega }X\right)f=\frac{\beta }{a_{yt}^H}\left(1-{a}_x^HX\left(1+\left(1+\tau \right)f\right)+\omega f\right). $$Plugging in the equation for ω (19) and simplifying gives equation (23).
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I thank Editor-in-Chief, George S. Tavlas, and an anonymous referee for helpful comments and suggestions.
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Azarnert, L.V. Agricultural Exports, Tariffs and Growth. Open Econ Rev 25, 797–807 (2014). https://doi.org/10.1007/s11079-013-9297-1
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DOI: https://doi.org/10.1007/s11079-013-9297-1