One of CEP's core research themes is the impact of trade openness on countries, firms, regions, communities and sectors.Two recent studies confirm the gains from opening up trade - but recognise that addressing the uneven outcomes of globalisation is as big a challenge as pursuing liberalisation in the face of entrenched interests.

Bernard, Andrew B.

Michaels, Guy

Redding, Stephen

Schott, Peter K.

English

Research Papers in Economics

CentrePiece Summer 2007
12
Sharing the fruits of trade
in brief...
One of the defining features of globalisation is increasing
openness to trade – the removal of a whole range of
barriers to the free flow of people, goods, services and
capital. Some of these trade barriers can take the form of
duties and tariffs levied at national borders. Others are
caused by standards – regulations covering labour,
environmental issues and health and safety – which differ
between countries and regions. Still others arise from
geography, for example, inaccessibility or a lack of
transport infrastructure. 
As these barriers are dismantled by economic
liberalisation, new transport networks and constant
innovation in information and communications
technologies, so the impact of trade openness on
countries, firms, regions, communities and economic
sectors is coming under closer scrutiny. 
One CEP study of the effects of new transport
infrastructure focuses on the US interstate highway
system, spanning over 40,000 miles, and mostly
constructed between 1956 and 1975. The highways had
three goals: to improve the connection between major
metropolitan areas in the United States; to serve US
national defence; and to connect with major routes in
Canada and Mexico. As an unintended consequence of
meeting these goals, the highways crossed many rural
areas, making it possible for researchers to examine their
causal impact on the local economy.
The research by Guy Michaels finds dramatic effects. 
A country where distances were long, travel was slow
and most economic activity was highly localised began to
integrate across its land mass. It soon became apparent
that the new highways had a big impact not on
passenger vehicles but on the large trucks that have
become the primary mode of cross-county commerce.
The highways increased trucking income and retail 
sales by 7-10% per capita in the rural counties they
crossed, relative to other rural counties. This suggests
that highway counties took advantage of the reduction 
One of CEP’s core research themes is the impact of trade
openness on countries, firms, regions, communities and
sectors.Two recent studies confirm the gains from
opening up trade – but recognise that addressing the
uneven outcomes of globalisation is as big a challenge as
pursuing liberalisation in the face of entrenched interests.
Success breeds success, often 
for the vast majority – but 
the fruits of commerce are not
always enjoyed by allCentrePiece Summer 2007
13
in trade barriers to increase their trade with 
other counties.
More surprising perhaps are the findings on how the
highways affected the demand for skills in rural areas.
On average, the highways had no effect on the demand
for high-skilled workers relative to low-skilled workers.
But the highways increased the demand for high-skilled
workers compared with low-skilled workers in counties
where skills were abundant and reduced demand where
skills were scarce.
In other words, by opening new markets, the highways
disproportionately benefited high-skilled workers where
skills were abundant and hurt them where skills were
scarce. This finding is consistent with the view that trade
increases the demand for the abundant factor. 
Other CEP research on trade liberalisation – by Stephen
Redding and colleagues – sheds more light on how the
reduction in barriers to trade reallocates economic
activity. Here too, the pattern that emerges is one of
success reinforcing success. 
At the most basic level, the researchers find that a
reduction in trade barriers encourages simultaneous job
creation and job destruction in all industries, but that
gross and net job creation vary with country and industry
characteristics.
Significantly, there is a net loss of jobs in industries with a
comparative disadvantage (those where relative labour
and non-labour costs are high), while industries with
comparative advantage enjoy net job creation as job
losses due to exiting firms are exceeded by jobs created
by the entrance and expansion of high-productivity firms.
Likewise with productivity levels and average firm
output: the gains from liberalisation are greatest in
industries with comparative advantage. Interestingly, it is
in these industries that the research finds the highest
levels of 'creative destruction' of firms, which may
explain why workers in these more dynamic sectors
report higher levels of job insecurity.
That the overall effect of opening up trade is to increase
aggregate welfare is not in doubt, as both studies make
clear. As average productivity increases, so the price of
goods is driven down, reinforcing the virtuous circle. But
welfare gains are not experienced uniformly, and just as
some regions or sectors have to grapple with the
handicaps of a low skills base or high input costs, so too
do developed and less developed economies. 
Contrary to the anti-globalisers, success breeds success
not just for the few but for the many – and often for the
vast majority. But the fruits of commerce are not always
enjoyed by all. Addressing those uneven outcomes is as
big a challenge for politicians as pursuing liberalisation in
the face of entrenched interests. Most agree on the need
to ‘manage‘ globalisation. That shouldn’t mean reining it
back, but helping everyone to jump on board.
This article draws on research described in 
‘The Effect of Trade on the Demand for Skill –
Evidence from the Interstate Highway System’ by
Guy Michaels, CEP Discussion Paper No. 772
(http://cep.lse.ac.uk/pubs/download/dp0772.pdf)
and ‘Comparative Advantage and Heterogeneous
Firms’ by Andrew B Bernard, Stephen J Redding
and Peter K Schott, Review of Economic Studies
73(1): 31-66, 2007.
Guy Michaels is a lecturer in economics at LSE
and a research associate in CEP’s labour markets
programme. Andrew Bernard is at Dartmouth
College. Stephen Redding is research director of
CEP’s globalisation programme. Peter Schott is at
Yale University.
Transport
infrastructure 
like the 
US interstate
highway system
increases trade

In brief: sharing the fruits of trade.

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