monopoly provision.<sup>6</sup> The gain comes from firms having to reduce their mark-ups in the face of greater competition.

Those gains from opening up will be even greater if accompanied by a freeing up of domestic markets and the market for currency exchange. The more stable is domestic macroeconomic policy, the more attractive will an economy be to capital inflows. And the more domestic microeconomic policies are friendly to markets and competition for goods, services and productive factors, the greater the likelihood that adjustments by firms and consumers to trade liberalization will lead to a moreefficient utilization of national resources and greater economic welfare (Corden 1997). If domestic policy reforms included improving the government’s capacity to redistribute income and wealth more efficiently and in ways that better matched society’s wishes, concerns about the distributional consequences of trade liberalization also would be lessened.

With the vastly increased scope during the past decade to separate in time and space the various productive tasks along each value chain, thanks to the ICT revolution, firms are increasingly able to take advantage of factor cost differences across countries for specific tasks without having to sacrifice gains from product specialization or move the whole of their production operation offshore (Hanson, Mataloni and Slaughter 2005). Trade in many tasks (e.g., emailing data files) is not even recorded in official trade statistics and so is not directly subject to trade policies. That suggests the variance of import protection across all traded items is even greater than across just recorded trade in goods, so the welfare gains from reducing the latter could well be greater than that captured by conventional trade models.

# **_Dynamic economic gains from own-country trade and subsidy reform_**

To the standard comparative static analysis needs to be added links between trade and economic growth. The mechanisms by which openness contributes to growth are gradually getting to be better understood by economists, thanks to the pioneering work of such theorists as Grossman and Helpman (1991), Rivera-Batiz and Romer (1991) and the literature those studies spawned, including econometric papers based on firm-level databases. Channels through which openness to trade can affect an economy’s growth rate include the scale of the market when knowledge is embodied in the products traded, the degree of redundant knowledge creation that is avoided through openness, and the effect of knowledge spillovers (Romer 1994, Taylor 1999, Acharya and Keller 2007).

The dynamic gains from openness can be greater when accompanied by reductions in domestic distortions. As one example, Helpman and Itskhoki (2007) develop a two-country two-sector model of international trade in which one sector produces homogeneous products while the other, which produces differentiated products, has firm heterogeneity, monopolistic competition, search and matching in its labor market, and wage bargaining (so that some of the workers searching for jobs end up being unemployed). The two countries are similar except for frictions in their labor markets. They show that both countries gain from trade but that the country with lower labor market frictions gains proportionately more, and that its flexible labor market confers comparative advantage: the flexible country is a net exporter of differentiated products. Either country benefits by lowering frictions in its labor

> 6 The argument for allowing such monopolies is that they could provide greater technical efficiency via their larger scale. The contrary argument is that, being sheltered from competition, they fall so short of that potential as to be less productive than two or more smaller-scale competing suppliers.

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