Tuesday, May 8, 2007

Technology and Trade

A reader asks where technological change fits into the analysis below. This question goes right to the heart of the matter. For trade to increase GDP without increasing factors trade must induce some type of technological change.

It seems pretty straight forward how this might happen with less developed countries. Technology transfer from the West pushes them closer to the frontier.

The argument gets a little more complex when you start thinking about developed countries. Anyway you slice it you are going to have to give up constant returns to scale to get technological growth from trade.

The options I see are:

1) The market for advanced technology grows which increases investments in R&D.

2) There are spillovers at the international level. That is, American firms learn techniques from foreign firms and vice versa. This is a little bit different than the first because a technique might be something like Total Quality Management which isn't quite the same as a new technological device.

3) Efficiency through dynamicism. I haven't seen this as a model but I think many economists believe that robust competition in and of itself can push the technological frontier. I think many observers would agree that AMD's competition with Intel was key in speeding up the development time in semi-conductors.

However, as I have said before once you open the door to these type of non-linear effects then the trade argument becomes much much more complex. For Example, it could be the case that increased trade gives the wealthier countries the opportunity to crush foreign competition early on. If you believe the dynamicism argument this might be bad in the long run.