Trade Liberalization in a Dynamic Setting: Implications of a New WTO Round

Warwick J. McKibbin
Warwick McKibbin
Warwick J. McKibbin Former expert - Economic Studies, Center on Regulation and Markets, Distinguished Professor of Economics & Public Policy - Crawford School of Public Policy, The Australian National University

September 1, 1999


This paper explores the impacts of a new WTO Round of trade liberalization over the
period from 2000 to 2010, using a model that allows for short run unemployment, adjustment costs in capital formation, international flows of financial assets and forward looking expectations of the announced policy changes. The focus of the paper is on the dynamic adjustment from 2000 to 2020 and the implications for short run global adjustment. So as to provide a metric for judging the scale of the results, the results are compared to policy in which there is a transfer of foreign aid to Asia Crisis countries. This policy is normalized so that the present value of consumption is equal for the recipient countries under both policies. The trade reforms lead to much higher global consumption for the same return to the Asia Crisis countries.

In addition, the paper considers the endogeniety of total factor productivity growth in manufacturing industries to changes in tariffs. This implements, in general equilibrium, the empirical results in Chand (1999). It is shown that these growth effects can lead to large gains to trade liberalization relative to the standard assumption of exogenous TFP growth but also can accentuate the adjustment process with short term policy implications.