Industrial Dynamics, International Trade, and Economic Growth

This paper presents a dynamic general equilibrium model to illustrate how international trade and dynamic trade policies a¤ect industrialization, industrial upgrading, and economic growth in a two-country world, where there is an in…nite number of possible industries di¤erent in their capital intensities. Analytical solutions are obtained to fully characterize the endowment-driven industrialization and inverse-V-shaped life cycle of each underlying industry along the aggregate growth path. We show that industrial upgrading and aggregate growth can be facilitated or hampered by the investment-speci…c technology progress in the trade partner, depending on whether the intertemporal elasticity of substitution is larger than unity. This is because it determines whether the intertemporal terms-of-trade e¤ect dominates the intertemporal market-size e¤ect. We also analytically characterize the growth e¤ect of any arbitrary dynamic trade policies. Accelerating trade liberalization is shown to have a non-monotonic impact on the speed of industrial upgrading and economic growth, again depending on the magnitude of the intertemporal elasticity of substitution.