Dynamic comparative advantage and the welfare effects of trade

Developing economies may face a trade-off between specializingaccording to existing comparative advantage (in low-technologygoods), and entering sectors in which they currently lack acomparative advantage, but may acquire such an advantage inthe future as a result of the potential for productivity growth(in high-technology goods). Comparative advantage is endogenouslydetermined by past technological change, while simultaneouslyshaping current rates of innovation. Hence, specialization accordingto current comparative advantage under free trade may be welfarereducing. Selective intervention may be welfare improving, bothfor the economy undertaking it, and for its trade partner.