Developing economies may face a trade-off between specializing according to
existing comparative advantage (in low-technology goods), and entering sec
tors in which they currently lack a comparative advantage, but may acquire
such an advantage in the future as a result of the potential for productivi
ty growth (in high-technology goods). Comparative advantage is endogenously
determined by past technological change, while simultaneously shaping curr
ent rates of innovation. Hence, specialization according to current compara
tive advantage under free trade may be welfare reducing. Selective interven
tion may be welfare improving, both for the economy undertaking it, and for
its trade partner.