GROWTH, SPECIALIZATION, AND TRADE LIBERALIZATION

This paper examines a two-way interaction between trade liberalization and economic growth. Through increasing returns to specialization, in ternational trade can increase world growth rates. But growth alters p atterns of comparative advantage, changing the incentives to levy tari ffs in a dynamic tariff Same between governments. Two types of equilib ria are analyzed. In a Tariff War equilibrium, growth rates are low, t ariffs are high and rising, the ratio of exports to income, the trade ratio, is low, and falls to zero asymptotically. In a Trade Liberaliza tion equilibrium, growth rates are high, tariffs are low and falling, the trade ratio is higher, and is increasing over time.