AS THE GLOBAL economy struggles with slow growth, political support for freer international trade has weakened, most notably in advanced economies and especially in the United States. While some resistance to freer trade is nothing new, it never stopped the postwar trade liberalisation process, which delivered growth in advanced economies and promoted convergence of per capita incomes throughout a significant portion of the developing world.
Opposition to trade remains a minority view – most people gain from trade, but it seems to have many more vocal enemies these days. Trade enables a country to use its resources more efficiently. But the gains from that greater efficiency may be divided unevenly among a country’s citizens, so that some of them lose out. The result can be greater income inequality and disrupted lives.
Over the past quarter century, the global economy has seen a seismic transformation thanks to increased trade and technological and political changes. While there is much progress to cheer at the global level, most governments have not ensured that gains from economic growth – including those due to trade – are broadly shared. In some places, tepid and declining overall income growth has brought frustrations to a boil.
Trade’s benefits have always been unequally shared, and maybe more so in recent years. But its gains are all the more important in today’s low-growth environment.
Countries must protect and expand these gains through policies that redistribute them more equitably. That will also make economies more resilient to a range of market forces, beyond those connected with globalisation.
Since World War II, progressive reduction in trade barriers such as tariffs and quotas has supported growth and welfare everywhere it was undertaken – in part by getting a greater variety of goods to households at lower prices.
Even more important, trade also has powerful positive effects on productivity – that is, the efficiency with which global resources are used to produce economic goods. These gains are especially important to reap in a world where economic growth seems to be slowing.
Even as there has been some drop in income inequality between nations in recent decades, inequality has risen within many nations. Trade and technology have both spurred the global convergence of incomes for many in poorer countries while shifting production patterns and income distribution within nations.
The fruits of growth, however, have not always been distributed equally in emerging market and developing economies. Roughly speaking, inequality has worsened most in Asia and eastern Europe, whereas in parts of Latin America – Brazil is a notable example – it has declined, while remaining high compared with much of the rest of the world.
Increased inequality in nearly all advanced economies, coupled with the recent slowdown in economic growth, has led to relatively slow long-term growth in household incomes except at the top. The causes of the slowdown are complex, but they stem partly from the global financial crisis.
The US case illustrates how economic growth in advanced economies has become less inclusive as it has slowed over the postwar period.
In 2014, US real median annual family income was US$53 657 according to US Census Bureau data, roughly the same in real (inflation-adjusted) terms as in 1989.
In contrast, this measure of income nearly doubled between the early 1950s and the late 1980s. After a period of rapid and more widely shared economic advancement, at least half of US households missed the benefits of economic growth over the past quarter century. (This was before an abrupt 5.2 per cent jump in median income in 2015 – whose durability remains to be seen.)
To a substantial degree, these developments reflect idiosyncratic national developments – such as changes in tax progressivity, executive pay constraints, or the financialisation of the economy.
But globalisation and technology are at least potentially universal drivers, so it is important to try to quantify their respective roles.
As noted, though, globalisation and technology are intertwined. Technological innovations, such as in information and communication technology, have made more trade possible – for example, in services such as banking and insurance.
Given the opportunity to enter export markets, or faced with import competition, businesses may innovate to upgrade production processes.
Foreign direct investment as well as trade can result in the spread of technological best practice across borders, which itself influences patterns of comparative advantage. In other words, globalised trade itself helps to make technology a global factor.
Globalisation offers the potential of economic gains for all, but there is no guarantee that potential will be realised absent decisive government action to support those who suffer from the side effects.
Years of seismic global transformation since the early 1990s, coupled with persistently low economic growth following the financial crisis, have left many individuals and communities behind.
As a result, a backlash against further trade and trade liberalisation is crystallising in a number of advanced economies.
Trade and trade policies have not, however, been the only factors behind these changes – they probably were not even the most important – nor are they the reason for slower growth.
Technological changes as well as idiosyncratic national developments also have played major roles.
The political consensus that drove trade policy over much of the postwar period will dissipate without a purposeful policy framework that spreads the risks of economic openness; ensures flexible labor markets and educated, agile workforces; promotes job matching; improves the functioning of financial markets; and directly addresses inequality of incomes.
This same framework is needed to address a range of other economic changes, which, like trade, can harm some and require adjustment within the economy.
Trade is special only in the illusion that governments can shut out the rest of the world when the world becomes inconvenient. In the 21st century, however, interdependence is not optional.
Maurice Obstfeld is the International Monetary Fund (IMF) economic counsellor and director of the IMF’s research department.