| There is growing literature that investigates the effect of trae leberalization on productivity. Nearly all such studies assume that trade policy is determined independently of productivity, hence it is exogenous. The author shows that this assumption is not valid in general, both theoretically and emperically, and that researchers may be underestimating the positive effect of liberalization on productivity when they do not account for the endogeneitybias. On the theory side, he demonstrtes that under a standard political economy model of trade protection, productivity directly influences tariffs. Moreover, this productivity-tariff relationship partly determinies the extent of liberalization across sectors even in the presence of a large exogenous unilateral liberalization shock that affects all sectors. The link between productivity and tariffs is maintained after the author includes in his political economy model a learning-by-doing motive of protection, which also serves as the source of liberalization. |