Why Economists Are Worried About International Trade

By N. GREGORY MANKIW. Excerpts:

"In a model pioneered by my Harvard colleague Marc Melitz, when a nation opens up to international trade, the most productive firms expand their markets, while the least productive are forced out by increased competition. As resources move from the least to the most productive firms, overall productivity rises."

"In a 1995 paper, the economists Jeffrey D. Sachs and Andrew Warner studied a large sample of nations and found that open economies grew significantly faster than closed ones."

"when closed economies remove their trade restrictions. Again, free trade fares well. Throughout history, when nations have opened themselves up to the world economy, the typical result has been an increase in their growth rates. This occurred in Japan in the 1850s, South Korea in the 1960s and Vietnam in the 1990s."

"Some countries trade less because of geographic disadvantages.

For example, New Zealand is disadvantaged compared with Belgium because it is farther from other populous countries. Similarly, landlocked nations are disadvantaged compared with nations with their own seaports. Because these geographic characteristics are correlated with trade, but arguably uncorrelated with other determinants of prosperity, they can be used to separate the impact of trade on national income from other confounding factors.

After analyzing the data, Mr. Frankel and Mr. Romer concluded that “a rise of one percentage point in the ratio of trade to G.D.P. increases income per person by at least one-half percent.”"