4 - Potential effects of foreign trade on development

Abstract

This chapter discusses in a preliminary way the potential effects of foreign trade on Chinese economic development, and focuses on the possible mechanisms through which foreign trade impacts economic development. One such mechanism is technology diffusion. Openness to foreign trade promotes total factor productivity (TFP) growth in China by facilitating technological spillovers from technologically advanced countries. Our preliminary empirical analysis in this chapter is based on a hypothesis positing that, given the level of TFP at the world technology frontier, China’s regional TFP growth is a positive function of regional openness to foreign trade and a negative function of the current level of regional TFP. Our regression results show that regional openness has a significantly positive effect on regional TFP growth, and that there is evidence for conditional convergence in TFP across China’s regions.