It has long been recognized that the dynamic effects of trade, such as the learning externalities that drive technological change, are likely to dwarf the static gains. According to the oral tradition in economics, the literature tended to focus on the static gains because the dynamic effects were poorly understood and supposedly impossible to measure. Yet recent work conducting natural and field experiments has found large effects from learning externalities associated with international trade, potentially shattering the received wisdom that this type of effect cannot be measured.
Perhaps the oldest and best known learning externality of trade is associated with the infant industry argument for protection. A developing country’s transformation curve shifts over time partly due to the learning-by-doing effect of “experience” in raising manufacturing productivity. As a result the manufacturing sector is too small under laissez faire. There is an efficiency gain to protecting or subsidising the manufacturing sector because the additional manufacturing output contributes to social benefit by enhancing future productivity. Two challenges arise with identifying empirically the effects of infant industry protection. First, even if the industry becomes competitive after receiving protection it is difficult to know whether it would have become competitive anyway. Second, in the case of a policy intervention, it is not possible to disentangle the effect of the market imperfection from the effect of the policy intervention itself. A recent paper by Réka Juhász has addressed both issues by treating the protective effect on the French cotton industry of the Napoleonic Wars (1803-1815) as a natural experiment. Exogenous within-country variation in the effectiveness of the naval blockade makes it possible to address the first challenge identified above. The fact that the protection does not arise as the result of a policy addresses the second. The results show that areas that received a larger trade cost shock during the Napoleonic Wars increased production capacity in mechanised cotton spinning to a larger extent than areas which received a smaller shock. This research suggests that economically significant learning effects can arise from protection. Future research could usefully ask how to obtain these effects without falling into the usual traps that accompany protective interventions.
“Learning from exporting” is perhaps the newest type of learning externality to be identified in the literature on international trade and appears to have emerged from policy circles. Early attempts to identify this effect found little evidence of it, finding instead that more productive firms tended to select into exporting and not the other way around. But recent research by David Atkin, Amit Khandelwal and Adam Osman based on a randomised trial conducted in Egypt offers compelling evidence to the contrary. The trial randomly assigns access to international markets across a sample of firms, making it possible to causally identify the impact of exporting on profits and productivity. Treatment firms report 15-25 percent higher profits and exhibit large improvements in quality alongside reductions in output per hour relative to control firms. These important results give rise to a new research agenda to understand the apparent conflict between the failure of early attempts to find learning externalities and the success of these new results. A related question that could usefully be explored in future research concerns the extent to which these results vary with the quality of domestic institutions such as the rule of law and enforcement of property rights.
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