Effects of trade policy on total factor productivity

Abstract

This paper examines if trade policy can account for the difference in total factor productivity (TFP) across countries. A two-sector dynamic international-trade model is developed where technological progress is neutral and a coalition of workers can stop the adoption of new technologies. The key findings are the following: (i) With free trade, or tariff, the best technology is always used and TFP is always at its highest value. Under a quota, this is not always the case and TFP is generally below its highest value; (ii) even controlling for difference of skilled labor (or human capital), workers from the quota economy have smaller productivity than workers from the free trade economy.