"The Never-Ending Question" examines the widely held theory that free trade increases growth. The rationale behind this is that free trade encourages technology to be imported from other countries, and that free trade also leads domestic companies to be more competitive in order to compete against foreign imports. The most widely accepted supporters of this theory are Sachs and Warner, who published an article in 1995 which examined both developing and developed countries, and which found that those countries which had relatively high levels of free trade also enjoyed higher levels of growth during the 1970s and 1980s.
However, a new study by Rodrik and Rodriguez holds that Sachs and Warner defined open trade in ways that are now necessarily causal to economic growth, and accept only two of the remaining criteria. When examined in this light, the correlation between growth and free trade is much more tenuous. The article takes issue with Rodrik's study, and instead suggests that any cross-country studies are likely to be flawed with regard to openness and economic growth. Instead, the author suggests that when viewed on an economy-by-economy basis, the relationship between openness and free trade is, in fact, intact and strong.
The article is highly relevant to trade policy because trade policy is a highly charged political issue in both developed and developing countries. Some countries maintain that closed trade policies help new industries take hold and stimulate growth by keeping jobs and currency at home, while other countries maintain that open and free trade stimulates growth by infusing the economy with often-needed hard currency and providing investment which would not otherwise be available. If the study by Sachs and Warner is considered valid, then those politicians who want to promote free trade have a powerful weapon to use in their arguments. If, on the other hand, Sac
...