Trade Liberalization and Heterogeneous Time Preference across Countries: A Possibility of Trade Deficits with China

Strategies for trade liberalization in developing countries when time preference rates are heterogeneous across countries are examined in the context of endogenous growth. The paper concludes that the best strategy for a developing country with the higher rate of time preference is generally the strategy of free trade with wielding market power if the country is large enough to wield market power, because all the optimality conditions are satisfied and markets are not distorted. By this strategy, the country generally accumulates current account surpluses, which implies a possibility that China implicitly has taken this strategy.