Intertemporal and cross-sectional contrasts in effects of trade: Significance of the technology content of exports

Abstract

This study identifies cross-country and intertemporal differences in the effects of trade exposure on per capita national income. We develop a small open economy endogenous growth model with high- and low-technology sectors and endogenous human capital accumulation. We then test the predictions of our model on a sample of 70 countries over the period 1980–2017. Our main assertion is that gains from trade are not only disproportionate across countries but also contrasting over time, depending on the technology intensity of exports. Countries with lower initial experience in the production of technology-intensive goods and services tend to specialize in sectors with lower demand for better-educated and high-skilled workforce, which lowers the return to and individual incentives for education. Consequently, trade-induced specialization patterns, due to their implications about technological progress, appear to be an important factor causing cross-national divergence in welfare. Our theoretical model implies that, in an unskilled labor-abundant country, higher exposure to international trade can decrease the long-run growth rate, even though it increases short-run per capita income. In a skilled-labor abundant country, both short-run and long-run effects are positive. Our empirical findings, which identify short-run and long-run effects separately, strongly support these predictions.