| We study the effects of trade on economic growth in a Schumpeterian framework. The model excludes scale effects and technology transfer, the two usual channels in the literature through which trade affects growth, leaving only comparative advantage. Comparative advantage and the trading pattern are determined endogenously. Endogeneity of production and trading patterns leads to results quite different from those found in most of the related literature. Trade need not increase initial output of either country because of an externality absent from static models. Irrespective of what happens to initial output, trade may increase the balanced growth rate but also may decrease it. Our model has tractable transition dynamics, which we describe completely. We show that trade leads to a stable world income distribution in some cases, but in other cases leads to an unstable and perhaps even degenerate distribution. In some cases, trade's effect on a country's growth rate is the same as if that country had adopted its trading partner's R&D technology, even though no technology transfer ever occurs. Trade could have negative effect on welfare. All taxes and tariff have negative effect on welfare, even under the case that the government uses the tax revenue of corporate profits to subsidize the incumbent R&D. |
