Contact: Dennis Brown, associate director for public relations and information, University of Notre Dame, (219) 631-7367; [email protected]
That there has been substantial growth in world trade over the past half century goes without saying. But why?
Two schools of thought have emerged on what the noted MIT economist Paul Krugman calls this "surprisingly disputed" question.
One school -- usually advanced in journalistic discussion -- is that technology-led declines in transportation costs and improvements in communications have been the leading factors. The other -- favored by international economists -- points to policy-induced trade liberalization.
Both theories are logical, but no one knew which was right because there never has been an empirical examination of the predominant sources of the post-World War II growth in world trade. Until now.
In the lead article of the February issue of the Journal of International Economics, University of Notre Dame economists Jeffrey Bergstrand and Scott Baier analyze the relative effects of transport-cost reductions, tariff liberalization, income growth, and income convergence on the growth of world trade since World War II among 16 countries in the Organization of Economic Cooperation and Development.
Their conclusion: The economists are right.
After accounting for trade growth attributable to income, tariff-rate reductions and free-trade agreements were responsible for 75 percent of the growth of trade (relative to income), while transport-cost declines accounted for 25 percent. (Increased income similarities among countries accounted for virtually none of the growth in trade.) Thus, international economists have the edge in the trade-policy vs. technology debate.
The study is titled "The Growth of World Trade: Tariffs, Transport Costs, and Income Similarity."
Bergstrand is an associate professor of finance and business economics, the 1st Source Bank Faculty Fellow in the Mendoza College of Business and a faculty fellow of Notre Dame's Kellogg Institute for International Studies and Kroc Institute for International Peace Studies. In addition to studying international trade issues, he teaches and conducts research on international finance and open-economy macroeconomics issues.
A member of the Notre Dame faculty since 1986, Bergstrand previously served as an economist for five years at the Federal Reserve Bank in Boston. He earned his doctoral and master's degrees from the University of Wisconsin and his bachelor's degree in economics and political science from Northwestern University.
Baier, an assistant professor of finance and business economics at Notre Dame since 1996, teaches and conducts research in the areas of international trade, growth and development, the effects of taxation on growth and welfare, monetary theory, and business cycles. He earned his bachelor's degree in journalism and master's degree in economics from Bowling Green State University and his doctorate in economics from Michigan State University.
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Note to the media: A copy of the study is available on the World Wide Web at .
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