Investment and Trade
The Uruguay Round Revisited

Research Fellows Joseph Francois, Bradley McDonald and Håkan Nordström, use existing classical growth theory literature to explore the interaction between trade policy and capital accumulation in a multi-sector, multi-country setting. The trade policy reforms considered are the basic elements of the Uruguay Round. The results are sensitive to the savings specification while the medium-run impact of the Round tends to be a simple multiple of the static impact when savings are fixed, although terms-of-trade changes may upset this direct linkage.

In contrast, if savings are determined endogenously within the model, by the condition that the opportunity cost of postponed consumption should equal the net marginal return of capital – the medium-run impact of trade policy can differ quite substantially from its static impact. The induced impact on capital formation may reinforce or weaken the static impact, or even reverse the short-term impact if returns to investment fall. The authors conclude that the traditional focus on static effects is potentially misleading and that the underlying savings behaviour matters crucially for the qualitative implications of trade policy reforms in a dynamic context.