On the dynamic effects of trade

Steve Randy Waldman has a terrific post on the ongoing debate on free trade. He refers to a passage in Tyler Cowen's recent post on the same subject which caught my attention. This is what Cowen says:

More empirically, having your export prices bid up is a wonderful driver of growth more than it is a distributional or efficiency nightmare.  The net externalities of that process are usually positive rather than negative, even without firm- or industry-level increasing returns in the traditional sense.  The exports help build a middle class and in the long run make democracy and rule of law possible.  The dynamic effects are the key to the benefits of trade, and neither the Ricardian nor the Heckscher-Ohlin model is satisfactory.  The best simple (ha!) model has trade bringing more innovation, new goods with high consumer surplus, greater reason to work hard and get ahead, greater domestic inequality, a growing middle class, and new and usually more liberal political coalitions.

The claim in this paragraph may or may not be true in general (I can certainly think of stark exceptions beyond oil and diamonds which Cowen subsequently mentions—think of cotton exports in antebellum U.S. for example).  But the reason the excerpt made me jump is the similarity it has to arguments that proponents of import substitution often make in support of trade protection. After all, if you believe higher prices for your industries are good for all kind of dynamic and political effects, why not apply the same reasoning to your import-competing industries as well—especially if they are the only industries you have (your exports being dominated by traditional commodities). Now, we can suppose that competing in world markets is different than producing for the home market and bring in additional considerations. But the main point is this: the more we depart from the standard models, the more we open up the field to all kinds of unconventional conclusions.

Which is totally fine by me. Really.

Comments

[LaRae]

This is probably a big question but... What reading would you recommend for someone who wants to learn more about international trade theory? I have a BA in Economics so some of the theories you mention are familiar but I would like to learn more. I also have an extensive math background so I'm not afraid of all those scary equations.

Feel free to shamelessly self promote and recommend your own work.

[Butter]

The oil and diamonds trade is controlled/monopolized by governmnets - that is what is driving the undesirable outcomes in these areas folks, not the trade itself.