Trapped Factors and China’s Impact on Global Growth Nicholas Bloom, Paul Romer, Stephen J. Terry, John Van Reenen⇤ April 2019 Abstract In response to a recent increase in Chinese import competition, European firms increased their innovation. We present and then rationalize these cross-sectional patterns using “trapped factors” at the micro level within a stylized equilibrium model of product-cycle trade and growth. Trade integration of the magnitude observed between the OECD and low-wage nations as a whole can considerably increase the long-run growth rate and welfare. In the short-run exposed firms devote trapped factors to increased innovation, leading both to in- creased innovation at these firms in the cross section as well as to a small amount of extra transitional growth overall. China alone accounts for half of the dynamic trade gains. Keywords: innovation, trade, China, endogenous growth JEL Classification: D92, E22, D8, C23. ⇤Bloom at Stanford, NBER, and SIEPR, Romer at NYU Stern, Terry at Boston University, and Van Reenen at MIT, the Centre for Economic Performance, and NBER. Correspondence to
[email protected]. A code packet to produce the results in this paper can be found at Nicholas Bloom’s website: http://www.stanford.edu/~nbloom/. A summarized version of this paper is available as Bloom et al. (2013a). We thank the ESRC for financial support through the Centre for Economic Performance and the National Science Foundation. We would like to thank our formal discussants, Chad Jones and Michael Sposi as well as Steve Redding and participants in seminars at Harvard, LSE, Philadelphia, San Diego, WEAI Seattle, Stony Brook, the West Coast Trade Workshop, and Stanford.