Trade Policy and Economic Transformation

Marie-Agnes Jouanjean, Max Mendez-Parra and Dirk Willem te Velde, July 2015


Trade has historically played a crucial role in the debate on economic transformation (ET), but the transmission mechanisms of different types of trade policies have not always been clearly articulated and empirical evidence is lacking in specific areas.

ET involves moving resources between sectors (for example, from agriculture to manufacturing); and improving productivity within sectors (for example, from subsistence agriculture to high-value crops), including through firm entry and exit, as well as within firms.

ET and trade are intimately linked through, for example: diversification of production and trade; discovery and development of new productive capabilities through trade; and creation higher domestic value added in trade.

Whilst there has been a firm belief in a strong link between trade and transforming productive structures, it remains too ambitious to identify a unique and unambiguous link between trade policy, trade, and economic structures. Import substitution strategies were used during the 1960s and 1970s to move resources from, typically, natural-resource-based sectors to manufactures. In the late 1980s and early 1990s, trade liberalisation was one of the most important policy tools under the so-called Washington Consensus.

This briefing discusses the effects of trade (related) policies and how trade policy affects ET through multiple channels: allocative efficiency, market size, competition, access to inputs and backward linkages, forward linkages, skills and technology, and political economy.

The briefing identifies several areas that require empirical work: (i) empirical evidence on the way in which trade affects the within and between components of productivity change and ET; (ii) building up more evidence on what drives exports of services, incl. the role of trade policy played in this; and (iii) the effects of different forms of global and regional value chains on ET.