Trapped Factors and China's Impact on Global Growth

Nicholas Bloom, Paul M. Romer, Stephen J. Terry, John Van Reenen

NBER Working Paper No. 19951
Issued in March 2014
NBER Program(s):   DEV   EFG   IFM   ITI   PR

In a general equilibrium product-cycle model, lower trade barriers increase Southern purchasing power, which lifts long-run growth by increasing the profit from innovation. In the short run, factors of production must be reallocated inside firms, which lowers the opportunity cost of innovation, generating an additional trapped factor effect. Starting from a baseline OECD growth rate of 2% we find that trade integration with low-wage countries in the decade around China's WTO accession could have increased long-run growth to 2.4%. There is an additional short-run trapped factors effect, raising growth to 2.7%. China accounts for about half of these growth increases.

http://www.nber.org/papers/w19951