How Does Trade Cause Growth?

There has been a large literature emphasizing the role of international trade in fostering economic growth. This paper goes one step further and explores how international trade can affect output growth. In particular, international trade can lead to higher growth to the extent that it translates into greater factor accumulation or productivity increases, especially those associated with technology diffusion and knowledge spillovers. We empirically analyze the different channels of growth, considering the trade relations between a country and its main trading partner and to “world growth poles.” Our findings suggest that two characteristics of trading relations are particularly important: which industries are involved and how traded products are produced. A positive spillover effect on economic growth is observed the larger the trade in similar industries, the greater the extent of upstreamness in exports (suggesting insertion in global value chains), and the higher the human-capital intensity embedded in the traded goods. Importantly, the type of products traded, e.g. whether commodities or high-tech goods, does not seem to matter in explaining what lies behind the trade-growth nexus. A decomposition of growth suggests that these factors work mostly through their effects on productivity (TFP) rather than on factor accumulation. Lastly, we provide strong evidence on the importance for economic growth of having trade linkages to one of the major “world growth poles”, and particularly when the pole is a developed country.