I am reading Dani Rodrik’s latest book (The Globalization Paradox) and the more I proceed forward, the more interesting it gets. Just wanted to put up this one where Rodrik lists preconditions required for trade to be always good for all.
The import liberalization must be complete, covering all goods and trade partners, or else the reduction in import restrictions must take into account the potentially quite complicated structure of substitutability and complementarity across restricted commodities. (So in fact a preferential trade agreement with one or a few trade partners is unlikely to satisfy the requirement). There must be no microeconomic market imperfections other than the trade restrictions in question, or if there are some, the second-best interactions that are entailed must not be too adverse. The home economy must be “small” in world markets, or else the liberalization must not put the economy on the wrong side of the “optimum tariff.” The economy economy must be in reasonably full employment, or if not, the monetary and fiscal authorities must have effective tools of demand management at their disposal. The income redistributive effects of the liberalization should not be judged undesirable by society at large, or if they are, there must be compensatory tax-transfer schemes with low enough excess burden. There must be no adverse effects on the fiscal balance, or if there are, there must be alternative and expedient ways of making up for the lost fiscal revenues. The liberalization must be politically sustainable and hence credible so that economic agents do not fear or anticipate a reversal.
This alone will not raise the level of aggregate real income. Nothing can be said definitely about growth even with the above preconditions are fulfilled. Here is why
In our standard models with exogenous technological change and diminishing returns to reproducible factors of production (e.g. the neoclassical model of growth), a trade restriction has no effect on the long-run (steady-state) rate of growth of output. This is true regardless of the existence of market imperfections. However, there may be growth effects during the transition to steady state. (There transitional effects could be positive or negative depending on how the long-run level of output is affected by the trade restriction). In models of endogenous growth generated by non-diminishing returns to reproducible factors of production or by learning-by-doing and other forms of endogenous technological change, the presumption is that lower trade restrictions boost output growth in the world economy as a whole. But a subset of countries may experience diminished growth depending on their initial factor endowments and levels of technological development. It all depends on whether the forces of comparative advantage pull resources into growth-generating sectors and activities, or away from them.
Now, it indicates the answer to the question “Is trade good?” is not as simple as “Yes, trade is always good to all”. It is much more complex than that.