Antoni Estevadeordal and Alan M. Taylor find that liberalizing tariffs on capital and intermediate goods is associated with faster growth: Is The Washington Consensus Dead? Growth, Openness, and The Great Liberalization, 1970s-2000s. From the abstract:
According to the Washington Consensus, developing countries' growth would benefit from a reduction in tariffs and other barriers to trade. But a backlash against this view now suggests that trade policies have little or no impact on growth. If "getting policies right" is wrong or infeasible, this leaves only the more tenuous objective of "getting institutions right" (Easterly 2005, Rodrik 2006).
However, the empirical basis for judging recent trade reforms is weak. Econometrics are mostly ad hoc; results are typically not judged against models; trade policies are poorly measured (or not measured at all, as when trade volumes are spuriously used); and the most influential studies in the literature are based on pre-1990 experience (which predates the "Great Liberalization" in developing countries which followed the GATT Uruguay Round).
We address all of these concerns -- by using a model-based analysis which highlights tariffs on capital and intermediate goods; by compiling new disaggregated tariff measures to empirically test the model; and by employing a treatment-and-control empirical analysis of pre- versus post-1990 performance of liberalizing and nonliberalizing countries.
We find evidence that a specific treatment, liberalizing tariffs on imported capital and intermediate goods, did lead to faster GDP growth, and by a margin consistent with theory (about 1 percentage point per annum). Endogeneity problems are considered and other observations are consistent with the proposed mechanism: changes to other tariffs, e.g. on consumption goods, though collinear with general tariffs reforms, are more weakly correlated with growth outcomes; and the treatment and control groups display different behavior of investment prices and quantities, and capital flows.
However, the empirical basis for judging recent trade reforms is weak. Econometrics are mostly ad hoc; results are typically not judged against models; trade policies are poorly measured (or not measured at all, as when trade volumes are spuriously used); and the most influential studies in the literature are based on pre-1990 experience (which predates the "Great Liberalization" in developing countries which followed the GATT Uruguay Round).
We address all of these concerns -- by using a model-based analysis which highlights tariffs on capital and intermediate goods; by compiling new disaggregated tariff measures to empirically test the model; and by employing a treatment-and-control empirical analysis of pre- versus post-1990 performance of liberalizing and nonliberalizing countries.
We find evidence that a specific treatment, liberalizing tariffs on imported capital and intermediate goods, did lead to faster GDP growth, and by a margin consistent with theory (about 1 percentage point per annum). Endogeneity problems are considered and other observations are consistent with the proposed mechanism: changes to other tariffs, e.g. on consumption goods, though collinear with general tariffs reforms, are more weakly correlated with growth outcomes; and the treatment and control groups display different behavior of investment prices and quantities, and capital flows.
And in the conclusions:
In summary, the results serve to remind us of a nuanced but often overlooked point about
trade policy in developing countries. It is the structure of protection, as much as its level, that
matters for growth. Poor countries are net importers of capital goods, and most are net importers of intermediate goods too. Demand for some types of goods, such as advanced equipment and machines, is satisfied almost wholly by imports. Long ago, Díaz Alejandro (1970) pointed out that if—like the Argentines—you double the price of a machine via trade barriers, then you are placing an enormous tax on investment and accumulation that will depress output. Historical evidence accords with his view (De Long and Summers 1991; Jones 1994; Taylor 1994, 1998) Consumption tariffs may have limited or ambiguous impacts on growth (welfare is another matter), but capital and intermediate tariffs impose a very clear cost on national efficiency.
Recent trade liberalizations—and their intellectual underpinnings, whether we label them the
“Washington Consensus” or not—should take some credit for unwinding many of those
inefficiencies from the 1980s to today. Where those barriers have dropped growth accelerations
have been significantly higher than where barriers have remained. Some countries have reaped
the benefits. More could yet do so and enjoy higher incomes and lower poverty rates—but this is
less likely to happen if any new consensus says that trade policy doesn’t matter very much.
trade policy in developing countries. It is the structure of protection, as much as its level, that
matters for growth. Poor countries are net importers of capital goods, and most are net importers of intermediate goods too. Demand for some types of goods, such as advanced equipment and machines, is satisfied almost wholly by imports. Long ago, Díaz Alejandro (1970) pointed out that if—like the Argentines—you double the price of a machine via trade barriers, then you are placing an enormous tax on investment and accumulation that will depress output. Historical evidence accords with his view (De Long and Summers 1991; Jones 1994; Taylor 1994, 1998) Consumption tariffs may have limited or ambiguous impacts on growth (welfare is another matter), but capital and intermediate tariffs impose a very clear cost on national efficiency.
Recent trade liberalizations—and their intellectual underpinnings, whether we label them the
“Washington Consensus” or not—should take some credit for unwinding many of those
inefficiencies from the 1980s to today. Where those barriers have dropped growth accelerations
have been significantly higher than where barriers have remained. Some countries have reaped
the benefits. More could yet do so and enjoy higher incomes and lower poverty rates—but this is
less likely to happen if any new consensus says that trade policy doesn’t matter very much.
Hat tip to Tyler Cowen at Marginal Revolution: Rexamining the Benefits of Free Trade.
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