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• The causes presented in the literature of the middle-income trap are generic, emphasizing the quality of the legal institutions of the country, demographic problems, the lack of social infrastructure, poor macroeconomic policies, etc. were already present in developing countries when they were growing fast. Besides, the income interval used on the studies on the trap was too large. • Instead of promoting the growth, the liberalizing reforms, which were more radical in Latin America than in Asia, caused an increase in the interest rate and dismantled the mechanism that neutralized the Dutch disease – both facts leading to the chronic overvaluation of the exchange rate, which represented a competitive disadvantage of the companies utilizing the best technology available. • In the economic literature, it is well established that the currencies of the commodity-focused economies tend to be appreciated in the long run because they face the Dutch disease. On the other hand, central banks in the region tend to define a high interest rate around which they organize their monetary policy so as to attract foreign capital and "grow with external savings" – this representing a second major cause of overvaluation of the national currencies of Latin American countries. • The main conclusion of the research is that, in the period of 1980–2016, the Latin American countries didn't fall into middle-income but a liberalization trap; the reason why they have fallen into quasi-stagnation while Asian countries did not lie in the liberal reforms. Opening trade in countries that have the Dutch disease meant dismantling the pragmatic mechanisms that neutralized it; financial liberalization limited the ability of countries to control distorted flows of capital and created conditions for the increase in the interest rate. • The instrument to neutralize the Dutch disease on the domestic market side were import tariffs on manufactured goods. To the extent that they were just neutralizing the Dutch disease, they were not protectionist – they were just giving the local manufacturing industry equal conditions of competition with the companies of other countries. If the import tariffs on manufactured goods were higher than what was required to neutralize the Dutch disease, they would be also protectionist. This paper offers an alternative explanation to the slow-down observed in the growth of developing countries. Instead of a middle-income trap what happened was a liberalization trap. Growth didn't happen because countries turned middle-income, but happened in a given period, around the 1980s, when these countries faced a serious foreign debt crisis and were constrained to open their economies. The studies on the middle-income trap have adopted a broad income interval and were unable to offer new historical facts that explained why these countries stop growing fast. Differently, this paper shows that the trade liberalization and the financial liberalization that started in the 1980s involved the dismantling of the mechanism that neutralized the Dutch disease and the change from low to high interest rates – both facts leading to a long-term or chronic overvaluation of the exchange rate that made the manufacturing industry non-competitive and caused deindustrialization and low growth. [ABSTRACT FROM AUTHOR]

Highlights • The imported inputs are incorporated into a structural decomposition analysis (SDA). • This approach is important in evaluating the net impacts of trade liberalization. • Brazilian high-tech exports growth was compensated for by imported inputs growth. • Agriculture, mining, and transportation were the most benefited sectors in Brazil. • The Korean, Chinese, and German high-tech sectors benefited the most. Abstract This study extends structural decomposition analysis (SDA) to consider the substitution between domestic and imported inputs. The approach provides a detailed investigation of the consequences on economic growth following changes in countries’ supply chains. We apply the method to data from Brazil and other countries. The results suggest that the substitution of imported for national inputs is a key factor in SDA, assuming that the impact of technological change is underestimated if this substitution is not taken into account. The findings also show that the substitution of imported inputs is essential to understanding the Brazilian growth path in the 2000s. The positive impact of export growth on total output was offset by the increase in imported inputs, especially in highly technological sectors. The results in Brazil stand in contrast with those in Korea, China, and Germany, where high-tech sectors benefited the most from the substitution. [ABSTRACT FROM AUTHOR]

Abstract: Free trade has been a universally accepted economic tenet for almost two centuries. Despite challenges, Ricardo''s theory of comparative advantage has proven to be one of the most enduring of all economic laws. In recent decades, however, the liberal trading system has come under increasing attacks in the form of strategic trade and industrial policies, the deindustrialization in advanced countries, rapid globalization and outsourcing, and others. This paper reviews each of these attacks and concludes that they do not justify abandoning or moving away from the general preference of a liberal trading system. [Copyright &y& Elsevier]