Protectionism, Trade and Growth

Abstract

Recent literature on trade argues that free trade may not necessarily be a desirable setting, as the standard Pareto-efficiency argument of perfect markets may not hold. In contrast to the previous literature, this model introduces the initial level of quality as an input to the “production” process of future products as a novel fact. This seems to fit the facts quite well, considering that very few countries are leading the worldwide innovation process. In this chapter, I try to ask whether “offensive” protectionism can be a possible policy to foster economic growth. A utilitarian model with exogenous product diversification but endogenous quality improvements is analyzed, in which a country with a relatively high quality level exhibits decreasing marginal productivity in research. Protectionism increases relative research productivity and fosters growth and product development. Therefore countries may eventually catch up, and Smithian absolute advantage with equal income in both countries is feasible.