Pandemic, Trade and SDGs: Opening up to trade affects growth positively in a number of ways
Pandemic, Trade and SDGs -3
Global Trade and SDG 2030 Goal 8: Decent work and economic growth
Unfortunately, the volume of world merchandise trade for the first three quarters of 2020 is currently down 8.2% compared with the same period last year due to the outbreak of COVID-19. While this decline is smaller than initially projected by the WTO, growth for the whole year largely depends on whether the recent resurgence of COVID‑19 takes a toll on trade in the fourth quarter. In the latter quarter of 2020, cases of COVID-19 have spiked worldwide, particularly in Europe which represents more than 35% of world merchandise trade. Preliminary merchandise trade values also indicate slower trade growth in October compared to September. This decline in world trade mirrors a worldwide decline in GDP growth. In fact, the global growth contraction for 2020 is estimated at -3.5 percent with a recovery of 5.5 percent in 2021 and 4.2 percent in 2022, though these projections are highly uncertain.
While the strength of the recovery is projected to vary significantly across countries and will depend heavily on access to healthcare, policy support, and country and region specific structural socio-economic landscape, it may be mentioned that global trade has been growing since a dramatic mid-century collapse due to the interrelated disruptions of conflict, weak economic conditions, and a rise in protectionism during the two world wars and the Great Depression. However, trade quickly recovered in the post war period and trade volumes surged by 7 percent per annum from 1950 to a high of roughly 60 percent of GDP by the 2008-09 Global Financial Crisis (GFC).
This period also marked a dramatic shift in global trade policy toward economic liberalisation. In the post-war period, high-income countries reduced tariffs to less than 5 percent by the 1980s in early GATT rounds. Simultaneously, developing countries undertook major unilateral liberalisations in the 1980s and 1990s. Regional trading agreements and arrangements have also become significantly more commonplace since the 1980s.
From the early 1980s until the late-1990s developing economies did not grow appreciably faster than developed ones and in some years grew more slowly, largely due to a prolonged period of weakness in prices of primary commodities that developing countries export disproportionately. Starting from 2000, developing countries growth rates significantly exceeded that of developed countries.
Emerging economies such as China and India regularly posted double digit growth rates. Trade has had a large part to play in the economic growth and income growth of many of these developing countries.
Also read: Trade can help achieve UN Sustainable Development Goal of achieving ‘No Poverty’
Despite high rates of GDP growth across developing countries on a whole, the speed of income convergence differs significantly across developing countries and the income gap between the richest and poorest countries remains large. Least Developed Countries (LDCs) in particular remain far behind, with a per capita income of $1,100 USD as compared to the developed country average of $45,353.52 USD.
Even small divergences in GDP growth between countries can produce dramatic differences in living standards over time. For example, a country that sustains a 3% per capita GDP growth rate can expect to see its income double in 23 years, whereas another country that only manages to grow 1.5% per year will have to wait 47 years to experience the same proportional change. Likewise, an economy growing at 7% can double its income in a decade, and it would be less at even higher rates.
In order to better understand the role of trade in achieving SDG:8 it is important to study the mechanisms by which trade impacts economic growth. Economists have observed that GDP per capita grows in two instances. In the first, countries accumulate resources and invest in physical, human or knowledge capital. In the second, countries utilise their resources more efficiently.
Opening up to trade affects growth positively in a number of ways. Trade improves resource allocation. Through trade, countries specialize in the production of goods or services that they can produce relatively cheaply, importing other goods and services, thus exploiting comparative advantages. By extending the size of the market in which the firm operates beyond national borders, trade allows firms to exploit economies of scale and become more productive.
Technology diffusion is also a key factor in long-term economic growth for many developing economies as it gives access to more advanced technological inputs available in the global market and because it enhances the incentives to innovate. Furthermore, imported capital goods and technical intermediate inputs can directly improve productivity by being placed into production
There is significant evidence that global value chains are a powerful conduit for technological innovation and adoption. The existence of GVCs has created an atmosphere of consistent relationship between foreign firms and domestic suppliers, incentivising knowledge and technology exchange.
When a foreign firm and a local supplier are part of the same production chain firms are more willing to invest. They need to interact and coordinate to guarantee a smooth functioning of the chain. The face-to-face communication needed to ensure smooth production facilitates the transfer of non-codified knowledge between foreign and local personnel, thereby increasing domestic innovative capacity. Moreover, GVCs incentivise the transfer of information and technology as foreign firms are incentivised to reduce the cost of investment required for production and customisation of the input as they are often the sole consumer of a specialised good. GVCs have been instrumental to the industrial transformation and economic growth of China, Viet Nam, Indonesia and Mexico.
Unfortunately, trade and trade agreements are now being blamed for harming the poor through the loss of manufacturing jobs, largely in developed countries. However, there are many possible factors that have contributed to the increase in inequality in developed economies. In fact, empirical evidence supports several net societal benefits of trade. One study confirms the positive relationship between trade and growth controlling for other factors. Here, an increase in trade openness of 1 percent of GDP is associated with 2to 6 percentage points higher per capita GDP. Other research finds that countries that liberalized trade in the 1980s and 1990s achieved higher growth (1.5 percentage points) than countries that did not liberalize. While these analyses are not necessarily definitive due to shortcomings in research methods like the confounding effects of other reforms, a wide variety of
research methods have consistently found a positive relationship between trade and growth.
Other evidence links trade with increases in productivity and innovation, key channels for raising growth. There is robust evidence that trade liberalisation not only increases industry productivity, both through reallocation to more productive firms and to improvements within firms. Trade openness also raises productivity across countries with particular benefit in sectors where lower tariffs reduce inputs costs . Finally, studies find a positive relationship between trade openness and long run employment. While the initial impact of trade liberalisation is country-specific, cross-country studies find that trade liberalisation and openness reduce long-run unemployment while other studies indicate that trade has a small but positive effect on aggregate labor market outcomes in advanced economies.
Trade liberalisation is correlated with higher employment in the long run as well as positive aggregate labor market outcomes in advanced economies. However, it is worth noting that trade liberalisation has heterogenous effects on countries, regions, industries, and individuals, largely dependent on their individual relationship to import competition and access to export markets that are the immediate results of trade liberalisation. Moreover, the regions, industries and individuals exposed to export markets experience labour market gains and positive socio-economic outcomes.
*Excerpted from report on WTO Contribution to the 2021 High-level Political Forum