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Can Free Trade Guarantee Gains from Trade?

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  • Cruz, Moritz
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    Abstract

    Static and dynamic gains from trade are the reasons why countries embark on the path of free trade, expecting this to promote industrialization and development. There is nothing, however, in the conventional theory of international trade that guarantees that these gains will materialize and even if they do, they may not accelerate industrialization and growth. This is because there are a number of deleterious effects that the same theory omits and/or ignores. They are, inter alia, the monetary effects of trade specialization on the balance of payments, loss of policy autonomy, deindustrialization and jobless growth. When the costs of free trade outweigh its benefits, the slowdown of industrialization and development are the likely results. To avoid this, gradual openness and government intervention are necessary. In this paper, these observations are examined by contrasting the experiences of China and Mexico since these economies introduced trade liberalization. The comparison sheds light on the type of policies that both open and still closed developing economies currently need to implement if they want to reap the static and dynamic gains from trade, and thus make real economic progress.

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    File URL: http://www.wider.unu.edu/stc/repec/pdfs/rp2008/rp2008-97.pdf
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    Bibliographic Info

    Paper provided by World Institute for Development Economic Research (UNU-WIDER) in its series Working Paper Series with number RP2008/97.

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    Length: 28 pages
    Date of creation: 2008
    Date of revision:
    Handle: RePEc:unu:wpaper:rp2008-97

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    Keywords: free trade; trade gains; industrialization; government intervention; China; Mexico;

    References

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    1. Penelope Pacheco-López & A.P. Thirlwall, 2004. "Trade Liberalisation in Mexico: Rhetoric and Reality," Studies in Economics 0403, Department of Economics, University of Kent.
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    8. Mauricio Mesquita Moreira, 2004. "Fear of China: Is There a Future for Manufacturing in Latin America?," IDB Publications 45778, Inter-American Development Bank.
    9. Eswar Prasad, 2004. "China's Growth and Integration into the World Economy," IMF Occasional Papers 232, International Monetary Fund.
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    12. A. P. Thirlwall, 2011. "Balance of Payments Constrained Growth Models: History and Overview," Studies in Economics 1111, Department of Economics, University of Kent.
    13. Lee Branstetter & Nicholas Lardy, 2006. "China's Embrace of Globalization," NBER Working Papers 12373, National Bureau of Economic Research, Inc.
    14. Egger, Peter & Larch, Mario & Pfaffermayr, Michael, 2007. "On the welfare effects of trade and investment liberalization," European Economic Review, Elsevier, vol. 51(3), pages 669-694, April.
    15. Dasgupta, Sukti & Singh, Ajit, 2006. "Manufacturing, Services and Premature Deindustrialization in Developing Countries: A Kaldorian Analysis," Working Paper Series RP2006/49, World Institute for Development Economic Research (UNU-WIDER).
    16. S.M. Shafaeddin, 2005. "Trade Liberalization And Economic Reform In Developing Countries: Structural Change Or De-Industrialization?," UNCTAD Discussion Papers 179, United Nations Conference on Trade and Development.
    17. Geske Dijkstra, A., 2000. "Trade Liberalization and Industrial Development in Latin America," World Development, Elsevier, vol. 28(9), pages 1567-1582, September.
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    Cited by:
    1. Hasan, Arsalan, 2010. "Costs and benefits of trade liberalization," MPRA Paper 25657, University Library of Munich, Germany.

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