SIZE MATTERS

Costinot and Rodriguez-Clare’s preferred estimate is that the gains from trade are about 2.5 percent of GDP. This is really not a lot. The US economy grew 2.3 percent in 2017,⁶¹ so one year of decent growth could pay for sending the US economy into complete autarky, in perpetuity! Did they get something wrong in their calculations? One can argue with many of the details, but the order of magnitude has to be right.

This is not so surprising. The US economy is very large and very diverse, and therefore capable of producing much of what is consumed there. Moreover, a lot of consumption is of services (everything from banking to house cleaning) not typically traded internationally (yet). Even the consumption of manufactured goods involves a significant share of locally produced services. When we buy an iPhone assembled in China, we also pay for US design and local advertising and marketing. The phone is sold in shiny Apple stores built by local firms and manned by local tech lovers.

We should not be carried away by the US example, however. Large economies like the United States and China have the skills and the capital to produce most things at a very high level of efficiency somewhere in the country. Moreover, their internal markets are large enough to absorb production from many factories in many sectors operating at the appropriate scale. They would lose relatively little by not trading.

International trade is much more important for smaller and poorer countries, like those in Africa, Southeast Asia, or southeastern Europe. Skills there are scarce and so is capital, and the domestic demand for steel or cars is unlikely to be big enough, given that incomes are low and populations are small, to sustain production at scale. Unfortunately, it is precisely those countries that face the biggest barriers to becoming players in the international market.

But for larger developing countries like India, China, Nigeria, or Indonesia, the bigger problem is often internal integration. Many developing countries suffer from a lack of internal connectivity. Nearly a billion people worldwide live more than a mile from a paved road (one-third of them are in India), and nowhere near a train line.⁶³ Internal politics sometimes add to that. China has excellent roads, but Chinese provinces have found ways to discourage domestic firms from importing goods from the rest of the country.⁶⁴ And until the recent introduction of unified taxes on goods and services in India, each state had the power to set its own tax rates, and often used them to favor local producers.