October 2008 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 andeven 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 ofindustrialization 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 currentlyneed to implement if they want to reap the static and dynamic gains from trade, and thus make real economic progress. Keywords: free trade, trade gains, industrialization, government intervention, China, Mexico JEL classification: F1, F13, F43
Copyright © UNU-WIDER 2008 * Universidad Nacional Autónoma de México (UNAM), Instituto de Investigaciones Económicas, México, email: firstname.lastname@example.org.This study has been prepared within the UNU-WIDER project on the Southern Engines of Global Growth, co-directed by Amelia U. Santos-Paulino and Guanghua Wan, and the UNU-WIDER Visiting Scholars Programme. UNU-WIDER gratefully acknowledges the financial contributions to the research programme by the governments of Denmark (Royal Ministry of Foreign Affairs), Finland (Ministry for Foreign Affairs),Norway (Royal Ministry of Foreign Affairs), Sweden (Swedish International Development Cooperation Agency—Sida) and the United Kingdom (Department for International Development). ISSN 1810-2611 ISBN 978-92-9230-151-4
Acknowledgements I completed this paper when I was a visiting scholar at the World Institute for Development Economics Research (UNU-WIDER). I am very grateful to the research andadministrative staff of UNU-WIDER for making my stay very pleasant.
Acronyms FDI foreign direct investment
NIEs newly industrialized economies SOEs state owned enterprises TNCs transnational corporations WTO World Trade Organization
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UNU World Institute for Development Economics Research (UNU-WIDER) Katajanokanlaituri 6 B, 00160 Helsinki, Finland Typescript prepared by Liisa Roponen at UNU-WIDER The views expressed in thispublication are those of the author(s). Publication does not imply endorsement by the Institute or the United Nations University, nor by the programme/project sponsors, of any of the views expressed.
According to the World Trade Organization (WTO 2007), nine out of the ten top economies with the largest share of trade in 2006 are in the developed world. Their shares account...