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Flows of trade

Link to economic growth

Average applied tariff and non-tariff barriers on imports to New Zealand
Source: World Bank (2008)

Trade allows countries to specialise in areas of comparative advantage. A country can raises its standard of living by exporting in areas where its firms are comparatively more efficient or more innovative than another countries' firms, and importing in areas where this is not the case. The ability to access a larger market provides economies of scale.

Imports stimulate domestic competition. Foreign competition can pressure domestic firms to remain competitive and increase productivity over time, or be forced to exit the market. Small countries tend to have relatively higher market concentration than larger countries, making foreign competition likely to be relatively more important.

Technology embodied in imports provides access to foreign knowledge. A number of studies have found that technology travels with imports, though the magnitude of spillovers is not firmly established.[65] FDI is likely to be a stronger channel for accessing foreign technology.[66]

Average applied tariff and non-tariff barriers on New Zealand's exports
Source: World Bank (2008)

Exporters are generally more productive than domestic firms. Studies consistently find that, on average, firms that export have higher productivity than purely domestic firms, though there is wide heterogeneity among firms.[67] Firms that also engage in outward investment are more productive again.[68]

Causality runs most strongly from productivity to exporting, not the other way round. The weight of the literature tends to suggest firms don't ‘learn by exporting.[69] Evidence based on New Zealand data also tends to support ‘self-selection', where more productive firms enter exporting. It is possible that firms ‘gear up' and increase productivity prior to exporting.[70] This finding means that the general productivity of a country's firms is a crucial driver of export performance.

Small countries tend to trade more than larger countries, relative to the size of the economy. A smaller domestic market provides limited economies of scale or access to global knowledge, and consequently small countries tend to trade more than larger countries.

Constraints to trade come from geographic, administrative, cultural, and information costs. A wide variety of factors tend to raise the costs of trading between countries, as summarised in Table 2.[71]

Export Propensity - % of GDP, 2005
Export Propensity - % of GDP, 2005.
Source:  OECD
Trade has complementarities with capital and people flows. Trade and investment liberalisation are often recommended together as they tend to reinforce each other. As discussed earlier, migration may increase trade by knowledge of social and business networks reducing transaction costs, or by migrants' preferences increasing demand for source country products. The linkages between trade and migration could be relatively stronger for New Zealand because of New Zealand's greater distance from markets and consequently greater transaction costs.

Spillovers from exporting are most likely in new activities. Spillovers from export activity are most likely to occur when the exporter is doing something new, such as starting to export, entering a new export market, or starting to export a new product.[72]


  • [65]For example: Madsen (2008) found that the international patent stock, as well as knowledge spillovers through imports, has contributed significantly to productivity growth. Gwanghoon (2008) found robust evidence of international knowledge transfers through flows of international goods imports. Busse and Groizard (2007) found that trade in general isn’t associated positively with per-capita income levels, but technological trade is. Eaton and Kortum (2001) found that geographical barriers to trade in equipment explain a high percentage of international differences in productivity due to geography’s impact on the relative price of equipment.
  • [66]Industry studies that have evaluated all four channels (importing, exporting, FDI, licensing of technology) tend to find significant individual productivity effects of FDI, exporting, and importing, but not licensing (Yasar and Morrison Paul, 2005).
  • [67]For example, see Figures 9, 10, and 12 in Fabling et al (2008).
  • [68]For example, see Mayer and Ottaviano (2007).
  • [69]Sanderson (2006) surveys both sides of the debate. Álvarez et al (2007) used comparable micro level panel data for 14 countries and found: “Our overall results are in line with the big picture that is by now familiar from the literature: …there is strong evidence in favour of self-selection of more productive firms into export markets, but nearly no evidence in favour of the learning-by-exporting hypothesis.”
  • [70]Hallward-Driemeir, Iarossi and Sokoloff (2002) argued that the increase in productivity just before entering export markets is due to an increase in investments aimed at raising productivity and the quality of goods in order to compete.
  • [71]Anderson and van Wincoop (2004) provided a literature survey of trade costs, including attempts to quantify the different types of costs (see Table 7).
  • [72]For example Hausmann and Rodrik (2002) argued that “In the presence of uncertainty about what a country can be good at producing, there can be great social value to discovering costs of domestic activities because such discoveries can be easily imitated.” Procter (2008) emphasises the importance of innovation (i.e. rather than exporting per se) and provides characteristics for when government intervention could be warranted.
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