ECONOMIC REPORT OF THE PRESIDENT

Box 5-1: Trade
Domestic and international trade are of critical importance to the
economy overall but also to innovation. Trade promotes innovation and
associated productivity growth in two ways: 1) by increasing the efficiency
of the innovation process, thus helping bring more innovations to
market, faster and at lower prices; and 2) by increasing the rewards that
an innovator realizes when his or her new idea succeeds.
Domestic trade—measured by commodity flows between geographies
in the United States—is an important driver of U.S. gross domestic
product (GDP) and productivity growth. Infrastructure is important
to domestic trade because it provides the means by which a firm can
efficiently ship its products from one location to another. Chapter 6 of
this Report covers the preconditions for, and consequences of, improving
the quality and quantity of U.S. transportation infrastructure in greater
detail, as well as how the interstate highway, long-distance freight rail,
and air transportation systems are particularly important to productivity.
These infrastructure assets also facilitate international trade.
International trade is also an important driver of innovation and
productivity growth. In the words of Nobel Prize-winning economist
Robert Solow (2007), “[r]elatively free trade has the advantage that the
possibility of increasing market share in world markets is a constant
incentive for innovative activity.” One recent review of the evidence calls
the relationship between globalization and productivity growth a “robust
finding” (De Loecker and Goldberg 2014).
International trade can drive productivity growth in several ways.
When U.S. firms sell abroad, they can sell more products per firm, and
this increase in scale may, in some cases, lead to lower costs and higher
productivity. International trade allows companies to access a larger
market, which results in greater revenues and potentially higher profits
for a given level of innovation, and therefore raises the incentive to innovate.
For example, recent economic research by Aw, Roberts, and Xu
(2008) finds that firms with experience in foreign markets have a greater
probability of R&D investment. Trade can also generate a positive effect
on aggregate productivity through reallocation. When firms are able to
grow and expand to meet demand from consumers in other countries,
these firms become a larger part of the economy and employ a larger
share of workers. Hence, the reallocation of labor and production toward
more productive firms as they expand after trade liberalization generates
higher aggregate productivity in the economy as a whole (Melitz 2003).
Moreover, trade can expose both exporters and importers to new
ideas and novel tools, materials, or techniques that make them more
productive. Some of this learning is simply copying, as when a firm
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