Dynamic comparative advantage and the welfare effects of trade

Abstract

Developing economies may face a trade-off between specializing according to existing comparative advantage (in low-technology goods), and entering sectors in which they currently lack a comparative advantage, but may acquire such an advantage in the future as a result of the potential for productivity growth (in high-technology goods). Comparative advantage is endogenously determined by past technological change, while simultaneously shaping current rates of innovation. Hence, specialization according to current comparative advantage under free trade may be welfare reducing. Selective intervention may be welfare improving, both for the economy undertaking it, and for its trade partner.