A BRAINSTORM ON THE FUTURE OF GLOBAL TRADE: WHY TO BE OPTIMISTIC AND WHAT WILL CHANGE


Global Trade has had an impressive growth trend over the last century. It has grown more than proportionally with GDP (from 10% of GDP in 1870 to 25% nowadays), becoming a fundamental part of economic activity everywhere in the world.

Global trade is academically recognized to be a fundamental cause of economic growth, both at the macro/national and micro/firm levels. It indeed generates clear efficiency gains by enhancing competition; by pushing for scalable patterns (i.e. economies of scale); and by stimulating learning and development at the firm level and then innovation. In other words, trade seems to be an optimal engine of efficiency and economic progress. In this regard, economic theory comes to our aid with the old "comparative advantage theory” and the more realistic and complete "new trade theory", where imperfect markets and economies of scale generate gains from trade even in case of equal endowments and institutions among nations.

However, efficiency does not always match with equality enhancement. International trade - in the globalized context we are living in - has indeed a very complex redistributive effect, so that understanding its role with respect to poverty or inequality turns out not to be an easy task. For instance, access to international markets may deliver higher average incomes to farmers who specialize in producing export crops, but may bring greater competition, that reduces the demand for poor workers in import competing sectors. Despite such evident trades-off, on aggregate, the WTO argues that trade has made a critical contribution to poverty reduction to date, and further integration of developing countries into international markets is the key to root poverty out. But gains from trade must be supported by complementary policies finalized to maximize the surplus spread among the poorest classes.

Having said that, no one can deny the WTO still has much work to do, since the world we live in is still walled up from border to border. The situation today is particularly delicate since nationalist wings have been coming to power throughout the west, bringing with them barriers against flows of both people and goods.

Newspapers report trade war news all the time. So, why to be optimistic on the future of international trade?

First of all, the main reason why to stay optimistic about future trade growth, despite all the trade wars the US is threatening the world with, lies just in an historical evidence. It is not the first time the US has imposed barriers to international trade and, at the end of the day, economics always proved more potent than politics. In fact, all these barriers collapsed as they were actually representing mere strategies for hoarding political consensus, more than effective economic maneuvers.

In this regard, the graph above shows how the US industrial sector is likely to have benefited from global trade gains since the beginning of the last century.

Second, the changing nature and greater complexity of global supply chains makes protectionism hard and harmful to pursue. Future technologies will probably make these “policies of closeness” less and less economically convenient to implement. A clear and simple example came out with the Trump's steel and aluminum tariffs imposition. Paul Krugman lucidly pointed out how neutral or counter-effective such a tactic was in terms of US employment and exports through 3 arguments: (i) the monetary policy stance was bound to adjust negatively eventually calling off job-creation; (ii) putting tariffs on intermediate goods like steel and aluminum will make US cars and other durable manufactured goods more expensive to produce, which means less competitiveness, and whatever gains there are in primary metals employment will be offset by job losses in downstream industries; (iii) other countries will retaliate against US exports generating incalculable and potentially enormous damages for the US economy.

Third, human beings around the world are tied together more closely than ever before, mainly because of the incredible migrations typical of our age and, trivially, because of the communication power of the internet. A lot of the recent cross-border migration is creating a strong pro-trade legacy, by setting up connections between home and host countries, that will yield dividends for decades to come. This view is coherent with the main research findings, which concur on the fact that a causal positive relationship between migration and international trade exists.

Finally, technology will boost the global trade trend up. Check out the next paragraph to know more about that.

World Trade Report on Technology and International Trade

The World Trade Report 2018 illustrates the interplay between digital technology and world trade. It looks at how the technologies of tomorrow (in particular the Internet of Things, Artificial Intelligence, 3D Printing and Blockchain) are transforming global commerce, and provides an analysis of the changes at play by estimating the extent to which global trade may be affected over the next 15 years. Roberto Azevêdo, the WTO General Director, has summarized the underlying argument that the rise of such digital technologies is going to project us into a new trading era. Such technologies have indeed the potential to profoundly transform the way we trade, who trades and what is traded.

The Report finds that one of the most significant impacts of digital technologies is the extent to which they will reduce trade costs, pushing for an increase of international trade, which is indeed predicted to grow yearly by 1.8-2 percentage points more until 2030, amounting to a cumulated growth of 31 to 34 percentage points over 15 years.

The report also highlights the role of digital technologies in shaping the composition of trade. Projections estimate that: (i) the services component of trade will pass from 21 percent to 25 percent by 2030; (ii) there will be a trade boost in certain goods such as time-sensitive products; (iii) new patterns of comparative advantage will emerge (regulation of intellectual property rights, data flows, privacy, and of course the quality of digital infrastructures); (iv) global value chains will change in terms of complexity and length.

As a result, developing countries are likely to gain an increasing share of global trade, from 46 percent in 2015 to a foreseen 57 percent by 2030. In fact, transforming international trade means to create new opportunities for a more enriching trading system but, in parallel with that, it raises new challenges.

In this regard, I propose a reflection on the matter - which is the takeaway I want you to pick: the expansion of digital trade is likely to entail considerable benefits at the world level, but international cooperation is needed to help governments ensure that digital trade continues to be an engine of inclusive economic development. As it is true for any big change driving our economic system, the approach of the most influential policy makers has a role in determining the direction towards which this change will lead us. The way nations will deal with this renewed system will have non-indifferent consequences on a global scale in terms of global inequality and economic convergence of nations

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