re-allocation is caused by the trade intervention that raised the profitability in
one sector by creating an artificial shortage. This is the loss in production effi-
ciency due to the tariff. The higher prices faced by consumers cause them to shift
consumption to other goods and services that they preferred not to consume
before the price rise. This is the consumption cost due to the tariff. These latter
two effects represent pure efficiency losses to the economy as a result of the
tariff. The benefit from trade liberalization (removing this tariff) would be a one-
off re-allocation of resources, removing this source of inefficiency.
Many economists have argued that there are also dynamic effects of trade
protection/liberalization that may offset or reinforce these one-off effects
(discussed in more detail later in the chapter). The government could use the
tax revenue to invest in infrastructure and education which will raise the long-
run growth rate of the economy. Trade protection may cut producers off from
world competition, making them less inclined to undertake the efforts associ-
ated with cutting costs and mastering new technology.
Openness is about more than just trade. Openness also encompasses expo-
sure to ideas and learning from overseas based on access to information and the
physical movement of people. Openness can be related to policy, for example,
controls on migration; it can be a matter of geography, such as whether a coun-
try is physically isolated; or it can be a matter of culture – how receptive is one
culture to the innovations or heresies of another culture?
Patterns of openness
Table 13.1 shows that since the late nineteenth century there have been several
major changes in patterns of openness. After the 1870s the UK’s overwhelm-
ing dominance in the export of manufactured goods declined, though rising
shares from elsewhere, particularly Germany, ensured Western Europe’s share
remained above 60 per cent. ‘Western offshoots’ saw their share increase, led
by the US between the 1870s and 1950s, then subsequently decline, first with
the emergence of Japan, and then in the 1980s and 1990s with the rise of China.
In 2011,China was estimated to account for about 10 per cent of world exports.
The growing presence of China in world manufactured exports is nothing new,
nor yet on anything like the same scale as that experienced by previously domi-
nant exporters.
Historically trade and other measures of global integration followed a ‘U’
shape, rising from the nineteenth century, declining between 1913 and 1950
then rising again to new heights in the post-war era. World merchandise
exports as a percentage of world GDP increased from 5.1 per cent in 1850 to
11.9 per cent in 1913, fell to 7.1 per cent in 1950, then increased steadily to
17.1 per cent by the early1990s (Krugman, 1995:331). For many countries
only by the 1990s did trade ratios surpass levels achieved in 1910.
After about 1870 there was a surge in global capital market integration.
This was led by London as the centre of the world’s financial system and was
270 Patterns and Determinants of Economic Growth