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We ask how barriers to international trade affect TFP when there are monopoly rights in the import-competing industries. Holmes and Schmitz [1995. Resistance to new technology and trade between areas. Federal Reserve Bank of Minneapolis Quarterly Review 19, 2–17] show that without barriers to trade TFP in these industries is as large as possible. We study the general case of finite barriers to trade. We find that binding quotas lead to the use of inefficient technology in the import-competing industries. In addition, finite quotas or tariffs imply that the import-competing industries produce larger than efficient quantities, if they produce at all. For both of these reasons, barriers to international trade reduce TFP.

During the past decade, the average Chinese earns roughly 9 times less and is 10 times less productive than the average American at purchasing power parity. Current consensus attributes large differences in output per worker to differences in total factor productivity (TFP). Evidence suggests that most of the US-China TFP differences lie in the inefficiency of China's domestic-oriented service and agricultural sectors. This paper focuses on (1) the evidence of monopoly rights and its influence on work practice improvement at China's firms and plants and (2) the evidence that policy arrangement there has encouraged more competition in merchandise manufacturing and heavy industries while barriers to market access remain high against new firms in the domestic market (especially in services). A numerical experiment is provided, which suggests that China can enhance long-term income per capita by a factor of 10 largely through TFP gains by implementing reform to weaken protection of monopolies and encourage entry in all industries.

We ask for which part of the observed cross‐country dierences in the level of per‐capita income monopoly rights can account. We answer this question in a calibrated growth model with capital. Monopoly rights in the capital‐producing sector shield labor market insiders from the competition by outsiders and permit coalitions of these insiders to choose inecient technologies or working practices. We find that monopoly rights can reduce the level of per‐capita income by quantitatively substantial amounts that are much larger than previously claimed. Moreover, the eects of monopoly rights on the price of capital goods relative to consumption goods and the investment share in output are quantitatively consistent with the Penn World Tables. The key to our findings is that monopoly rights in the capital‐producing sector do not only reduce total factor productivity there but also increase the relative price of capital. This reduces the capital‐labor ratio in the rest of the economy.