Nber Working Paper Series Trapped Factors and China's Impact on Global Growth

In a general equilibrium product-cycle model, lower trade barriers increase Southern purchasing power, which lifts long-run growth by increasing the profit from innovation. In the short run, factors of production must be reallocated inside firms, which lowers the opportunity cost of innovation, generating an additional trapped factor effect. Starting from a baseline OECD growth rate of 2% we find that trade integration with low-wage countries in the decade around China’s WTO accession could have increased long-run growth to 2.4%. There is an additional short-run trapped factors effect, raising growth to 2.7%. China accounts for about half of these growth increases. Nicholas Bloom Stanford University Department of Economics 579 Serra Mall Stanford, CA 94305-6072 and NBER [email protected] Paul M. Romer Stern School of Business New York University 44 West Fourth Street New York, NY 10012 and NBER [email protected] Stephen J. Terry Stanford University Department of Economics 579 Serra Mall Stanford CA 94305 [email protected] John Van Reenen Department of Economics London School of Economics Centre for Economic Performance Houghton Street London WC2A 2AE UNITED KINGDOM and NBER [email protected] An online appendix is available at: http://www.nber.org/data-appendix/w19951