In Discussion Paper No. 1183, Research Affiliate Dan Ben-David and Michael Loewy examine the impact of free trade on output levels and growth rates in the short and long run. They begin with some long-run empirical evidence on the behaviour of output and trade for 16 countries since 1870. They next continue with the development of a theoretical framework consistent with the long-run evidence presented, as well as with the income convergence/divergence evidence from related studies. This theoretical framework is based upon the premise that free trade spurs the dissemination of knowledge.

Their findings show: first, that countries with similar technologies will grow at the same rates in the steady state, though not necessarily at the same levels; second, that a unilateral reduction of tariffs by one country is enough to raise the steady-state growth rates of all countries – although more widespread reductions have even stronger growth effects; and lastly, a unilateral trade liberalization may enable the reforming country to overtake and surpass wealthier countries.

Free Trade and Long-Run Growth
Dan Ben-David and Michael B Loewy

Discussion Paper No. 1183, May 1995 (IM/IT)