## How Lowering Trade Barriers Can Revive Global Productivity and Growth _IMF Blog, June 20, 2016_ ## Source details **Canonical URL:** [How Lowering Trade Barriers Can Revive Global Productivity and Growth](https://www.imf.org/en/blogs/articles/2016/06/20/how-lowering-trade-barriers-can-revive-global-productivity-and-growth) ## Other formats - [Markdown version](/en/blogs/articles/2016/06/20/how-lowering-trade-barriers-can-revive-global-productivity-and-growth/index.md) - [Structured JSON version](/en/blogs/articles/2016/06/20/how-lowering-trade-barriers-can-revive-global-productivity-and-growth/index.json) - [Bundle manifest](/en/blogs/articles/2016/06/20/how-lowering-trade-barriers-can-revive-global-productivity-and-growth/bundle-manifest.json) ## Bibliographic details - Authors: Era Dabla-Norris, Romain Duval - Published: June 20, 2016 --- ### Overview and context - Publication: Era Dabla‑Norris, Romain Duval — June 20, 2016. - Central message: Easing barriers to international trade and foreign direct investment (FDI) could boost productivity and output, helping address weak productivity growth since the global financial crisis. - Recent policy momentum: Trans‑Pacific Partnership (TPP) and ongoing Transatlantic Trade and Investment Partnership (TTIP) negotiations highlight productivity and growth on policymakers’ agendas. - Empirical scope: New research uses a unique database of effective tariffs in 18 sectors across 18 advanced countries spanning more than two decades. ### Mechanisms: How trade and FDI liberalization lift productivity and output - Increased competition: - Lower trade and FDI barriers on final goods strengthen competition in liberalized sectors. - Effects include exploitation of economies of scale, improved efficiency, absorption of foreign technology, and innovation. - Enhanced variety and quality of inputs: - Trade liberalization increases the quality and variety of intermediate inputs used in final goods production. - Relative importance: - Productivity gains from tariff cuts on intermediate inputs outweigh gains from cutting “output tariffs” (tariffs on final goods). - Trade liberalization in upstream industries that use intermediate inputs matters more for sector‑level productivity than liberalization in the sector itself. - Quantitative finding: A one per cent reduction in input tariffs raises total factor productivity levels by about two percent. - Timing: Productivity gains materialize within 1-5 years, with effects leveling off thereafter. ### Size of estimated productivity gains - Historical contribution: - For countries in the sample, input tariffs fell on average by 0.5 percentage point over the decade 1997-2007, translating into an average productivity gain of about 1 percent. - Potential gains from eliminating remaining tariffs (back‑of‑the‑envelope): - Aggregate productivity could rise by around 1 percent, on average, across advanced economies. - Country variation: potential gains range from a 0.2 percent gain in Japan to a 5 percent gain in Korea. - Larger estimated potential gains for Ireland and Korea: - Korea: higher remaining effective tariffs than other advanced countries in the sample. - Ireland: strong reliance on imported inputs, especially in chemical and pharmaceutical sectors. - Caveat: These estimates are lower bounds because they do not account for gains from reallocation across industries or reduction of non‑tariff barriers. ### Complementarities with FDI and other policies - FDI amplifies tariff liberalization effects: - Productivity gains from reductions in both “output” tariffs and input tariffs tend to be higher in countries with less restrictive FDI regimes. - Possible mechanism: foreign firms use imported inputs more effectively and pay a lower fixed cost for importing, magnifying the input channel. - Quantitative interaction: - When the FDI restrictiveness index is at the 75th percentile, the impact of a 1 percentage point drop in input tariffs on total factor productivity ranges from zero to -1 percent. - When FDI restrictiveness is at the 25th percentile, the same 1 percentage point drop in input tariffs yields an impact ranging from 3 percent to 4 percent. - Broader complementarities: - Gains from trade liberalization may be larger alongside reforms in labor and product markets and reductions in “behind‑the‑border barriers.” - Non‑tariff barrier reduction, especially in services and customs procedures, is an increasingly important channel. ### Policy takeaways and recommendations - Case for further liberalization: - Further reduction of tariffs and non‑tariff barriers can raise productivity and output; estimates understate potential gains by overlooking non‑tariff liberalization benefits. - Emerging and low‑income countries, with comparatively higher barriers, could achieve even higher productivity gains. - Parallel reforms to amplify benefits: - Reduce barriers to FDI in parallel with tariff and non‑tariff liberalization. - Consider reforms in labor and product markets and reductions in domestic regulatory barriers to increase the productivity dividend. - Compensating policies for distributional effects: - Recognize potential costs: reallocation can cause wage cuts, job losses, and sectoral or geographic dislocation. - Implement supportive labor market policies (e.g., education and training) and other interventions to compensate displaced workers and promote equitable adjustment. - Include labor standards or other labor provisions in trade agreements to help distribute benefits more widely. *Source: How Lowering Trade Barriers Can Revive Global Productivity and Growth — Era Dabla‑Norris, Romain Duval, June 20, 2016.* --- ## References - [New research](https://www.imf.org/external/pubs/cat/longres.aspx?sk=43828.0) - [https://www.imf.org/wp-content/uploads/2016/06/slide1.jpg](https://www.imf.org/wp-content/uploads/2016/06/slide1.jpg) - [https://www.imf.org/wp-content/uploads/2016/06/slide2.jpg](https://www.imf.org/wp-content/uploads/2016/06/slide2.jpg) _Source: https://www.imf.org/en/blogs/articles/2016/06/20/how-lowering-trade-barriers-can-revive-global-productivity-and-growth_