Dynamic Effects of Trade

The existence of aggregate welfare gains from trade is one of the classic insights from international economics. However, these conventionalwelfare gains are static, in the sense that they take existing factor supplies and production technologies at a point in time as given. Recent research has highlighted dynamic effects of trade through endogenous factor accumulation and technological innovation over time, although there remains less consensus about the quantitative magnitude of these dynamic effects than about their static counterparts. Key insights from this research are that short-run and long-run responses to trade liberalization differ; capital accumulation amplifies the impact of international trade shocks; trade can facilitate technology adoption and the diffusion of ideas by changing the composition of suppliers; effects on lifetime welfare differ substantially from those on steady-state welfare, once transition dynamics are taken into account; and market failures can either magnify the overall welfare gains from trade or rationalize activist trade and industrial policies.