Can Trade Really Hurt? an Empirical Follow-Up on Samuelson's Controversial Paper

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In what has become quite a controversial paper, Samuelson (2004) has renewed the discussion that trade does not always and automatically bestow overall gains on each trade partner. Specifically, he discusses in a Ricardian setting that technological progress in the trade partner country (induced, for example, through imitation of goods exported from the home country) may hurt welfare in the home country. This is what is referred to as Act II in his paper. Taken up by media and enriched with some anecdotal evidence on theft of intellectual property by trade partners, politicians, business people, and ordinary citizens concluded that the negative impact of outward knowledge diffusion via trade might countervail the benefits from trade.

The heated public discussion on the Samuelson (2004) paper leaves a mark that the phenomenon was discovered only recently. However, Samuelson's (2004) contribution links to an important branch of the international economics literature that deals with the interaction of trade and technological competition as early as in the 1970s (Gomory and Baumol 1997, 2000; Johnson and Stafford 1993; Jones and Ruffin 2008; Ruffin and Jones 2007; Samuelson 1977). What all these papers have in common is that in one way or another, technological progress in the backward country may hurt welfare (usually measured as relative or real wages) in the technologically advanced home country. These are Samuelson's (2004) Act II-type effects. (1)

While these papers generally pay little attention to the actual drivers of technological progress in the foreign country, a substantial literature on international knowledge diffusion has evolved in parallel, as summarized recently by Keller (2004). On the theoretical side, papers such as Helpman (1993) and Eaton and Kortum (2001, 2006) provide models which discuss the implications of international technology diffusion on the incentives to innovate, and the relationship with trade. (2) Along with the theoretical literature, empirical studies generally acknowledge that trade is an important channel for the diffusion of foreign knowledge (e.g., Bitzer and Geishecker 2006; Coe and Helpman 1995). (3) A related literature stresses the importance of foreign direct investment (FDI) as relevant channels of technology transfer (e.g., Bitzer and Kerekes 2008; van Pottelsberghe de la Potterie and Lichtenberg 2001). Multinationals' headquarters possess certain firm specific assets (technology) which are, at least partly, transferred to the affiliate abroad (e.g., Markusen 2002). (4) Evidence shows that local competitors may subsequently learn the technology through either imitation, movements of workers, or input-output linkages with multinationals (e.g., Gorg and Greenaway 2004).

However, thus far the focus of the empirical studies on international knowledge diffusion has been on the effects in the country receiving the knowledge spillover. It is generally examined what impact knowledge from foreign countries has on output or productivity of the receiving (host) country. Obviously, this method can only partly help answer the questions that emerged with Samuelson's (2004) paper: First, does trade in itself transfer domestic knowledge to trade partners? Here, the answer from existing empirical studies is most likely to be yes. The second, and perhaps more important question is, however, whether this outward-diffusion of knowledge may hurt the home country. While there is anecdotal evidence that knowledge might diffuse to trade partners (e.g., Maskus 2000) there is, to the best of our knowledge, no formal empirical evidence to answer this question. (5)

This is the starting point of our paper. First, we examine in a simple Ricardian model situations in which, for example, export activity does not only mean the exchange of goods but also constitutes a partial export of the technology used to produce these goods. In the presence of such knowledge spillovers, Samuelson's Act II effect can occur. …


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