Does trade raise income?

The March 2005 issue of the Journal of International Economics  contains an interesting article, Trade raises income: a precise and robust result, by Marta Noguer from Ryerson University and Marc Siscart from NYU, which argues that it does. Here are their concluding remarks:

There is a large ongoing debate on whether international trade promotes income. This paper provides new evidence. Following previous work we use geography to instrument for trade. We use a richer data set that allows us to obtain a more powerful instrument, and to estimate the effect of trade on income with much greater precision. Further, we show that geographical controls must enter the income equation to avoid an upward bias on the trade coefficient. We find that countries that trade more reach higher levels of income. Our results indicate that a 1 percent increase in the trade share of GDP leads to about a 1 percent increase in income per capita. This estimate is remarkably robust to the inclusion of a wide array of geographical and institutional controls.

Though of course, there are some caveats:

Finally we want to stress that this paper studies the relationship between income per capita and the volume of trade. ...However, the implications for trade policy are more nuanced. While our results indicate that in general countries that are less open to trade due to geographical factors tend to have lower income, it is not necessarily the case that all trade policies that reduce openness will have an adverse impact on income.

Although the direct effect of closing seems to be negative, trade policy restrictions not only affect the volume of trade but they also affect the composition of trade. Hence, the net effect could still be positive. Therefore, our study cannot answer the (interesting and important) question of whether trade policy liberalization raises income. Even so, our results do underscore the important link between the ability to trade and per-capita income.

For those who don't have access to this journal, an alternative PDF version can be downloaded here.