Static and Cumulative Effects of Trade Liberalization on Productivity: An Empirical Analysis of the Indonesian Manufacturing Sector
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This study analyzes the effects of trade liberalization on economic growth under the assumption that the effects occur both instantly and persistently for a certain period of time. Therefore, this study differentiates between the static and cumulative effects of tariff reductions. In particular, it examines the effects of tariff reductions on the manufacturing sector using industrial level data for 39 sub-industries in Indonesia. Also, Indonesia is chosen for this study because Indonesia has become one of the most important trading partners for Korea. The empirical results show that tariff reductions do not only affect manufacturing sector production for a single year, but they also persistently affect production for the next three years. That is, a 1% tariff reduction increases the manufacturing sector value-added by 0.22%. In addition, the static and cumulative effects of a 1% tariff reduction on manufacturing sector productivity are 0.22% and 0.29%, respectively. The estimated results indicate that the effects of a tariff reduction do not disappear immediately; rather, they continuously influence the economy for a certain period of time.
Abstract
This study analyzes the effects of trade liberalization on economic growth under the assumption that the effects occur both instantly and persistently for a certain period of time. Therefore, this study differentiates between the static and cumulative effects of tariff reductions. In particular, it examines the effects of tariff reductions on the manufacturing sector using industrial level data for 39 sub-industries in Indonesia. Also, Indonesia is chosen for this study because Indonesia has become one of the most important trading partners for Korea. The empirical results show that tariff reductions do not only affect manufacturing sector production for a single year, but they also persistently affect production for the next three years. That is, a 1% tariff reduction increases the manufacturing sector value-added by 0.22%. In addition, the static and cumulative effects of a 1% tariff reduction on manufacturing sector productivity are 0.22% and 0.29%, respectively. The estimated results indicate that the effects of a tariff reduction do not disappear immediately; rather, they continuously influence the economy for a certain period of time.
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