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Trapped Factors and China's Impact on Global Growth

  • Nicholas Bloom
  • Paul Romer
  • Stephen Terry
  • John Van Reenen

When China's accession to the WTO exposed European firms to import competition, they responded by increasing their investment in innovation. This response was stronger in industries and firms where factors of production were less mobile. Motivated by this evidence, we incorporate "trapped factors" at the micro level into a general equilibrium model of product-cycle trade and growth. In a calibrated version of the model that starts with a baseline growth rate of 2%, trade integration between the OECD and low-wage countries can increase the steady-state growth rate to 2.4% per year. Factors that are trapped at a firm by an unexpected change in trade policy do not change this long-run growth rate, but in the medium run, they could have a noticeable effect on aggregate growth. Simulations of the model show that in the first decade after liberalization, growth jumps to 2.7% per year and that trapped factors account for almost all of the 0.3% = 2.7% − 2.4% increase above the steady state growth rate.

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Paper provided by Centre for Economic Performance, LSE in its series CEP Discussion Papers with number dp1261.

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Date of creation: Mar 2014
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Handle: RePEc:cep:cepdps:dp1261
Contact details of provider: Web page: http://cep.lse.ac.uk/_new/publications/series.asp?prog=CEP

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