Can trade really hurt? An empirical follow-up on Samuelson’s controversial paper

This paper investigates Samuelson’s (JEP, 2004) argument that technical progress of the trade partner may hurt the home country. We illustrate this prospect in a simple Ricardian model for situations with outward knowledge spillovers. Within this framework Samuelson’s Act II effects may occur. Based on industry level panel data for seventeen OECD countries for the period 1973 to 2000 we show econometrically that the outflow of domestic knowledge via exports or FDI to the rest of the world may have a negative impact on industry output in the home country. This is particularly so when exporting to technologically less advanced countries and, more specifically, China.