The WTO launches World Trade Report 2008: Trade in a Globalizing World

Trade and globalization have brought greater prosperity to hundreds of millions as well as greater stability among nations, according to a report published today by the World Trade Organization.

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Trade has allowed nations to benefit from specialization and economies of scale to produce more efficiently. It has raised productivity, supported the spread of knowledge and new technologies, and enriched the range of choices available to consumers. But deeper integration into the world economy has not always proved popular, nor have the benefits of trade and globalization necessarily reached all sections of society. As a consequence, trade scepticism is on the rise in certain quarters.

This year’s World Trade Report, entitled “Trade in a Globalizing World”, is devoted to an examination of the gains from international trade and the challenges arising from higher levels of integration. Over many years, governments in most countries have increasingly opened their economies to international trade, whether through multilateral trade negotiations, increased regional cooperation or as part of domestic reform programmes.

“Few would contest the benefits that globalization and trade have brought in terms of greater prosperity for hundreds of millions, as well as greater stability among nations. But many individuals in different societies across the world have shared little or not all in the benefits. The challenges facing governments in managing globalization are formidable, and success in spreading prosperity more widely requires a strong common purpose” says WTO Director-General Pascal Lamy in an introduction to the Report.

The Report explores a range of interlinking questions, starting with a consideration of what constitutes globalization, what drives it, the benefits it brings, the challenges it poses and what role trade plays in this world of ever-growing interdependency. We ask why some countries have managed to take advantage of falling trade costs and greater policy-driven trading opportunities while others have remained largely outside international commercial relations. We also consider who the winners and losers are from trade in society and what complementary action policy-makers need to take in order to secure the benefits of trade for society at large. In examining these complex and multi-faceted questions, the Report reviews both the theoretical trade literature and empirical evidence that can help to give answers to these questions.

The causes and consequences of globalization

The Report notes that the key economic characteristic of globalization is deeper integration of product, capital and labour markets. Globalization is driven by technological innovation, political change, and economic policy choices, and this process of integration has caused significant structural changes in parts of the world economy. The increased fusion of product, capital and labour markets internationally has resulted in a more efficient allocation of economic resources. Economic integration has resulted in higher levels of current output and prospects of higher future output. Capital can flow to countries which need it the most for economic growth and development. Allowing workers to move across national borders can alleviate skill shortages in receiving countries or respond to the needs in rapidly ageing societies while alleviating unemployment or under-employment in countries providing these workers.

Today’s industrialized economies were the early beneficiaries of globalization in the immediate post-war period, and more recently newly industrializing economies have been among the major winners from increasing economic integration. Trade has consistently grown faster than output in the world economy, and manufactures have accounted for an expanding share of total trade. Traded services have also grown significantly, although their importance is still poorly understood as a consequence of limited data. A major evolving feature of production is the fragmentation of production processes across multiple jurisdictions. International capital flows have played a vital role in the internationalization of production, and more generally in fostering globalization.

Qualified public support for globalization

International surveys of public attitudes towards globalization suggest that a majority of people recognize these benefits. But this recognition is accompanied by anxieties about the challenges that come with globalization. While large majorities believe that international trade benefits their countries, they also fear the disruptions and downsides of participating in the global economy. Seemingly, stronger support exists for trade in some emerging economies than in industrial countries. Support for globalization appears to be waning in the industrialized countries even though it still enjoys the support of a majority of the public. For policymakers who embrace more open markets, survey results indicating overall support for globalization may be encouraging, but disregard for rising public concern about some aspects of globalization threatens to undermine the legitimacy of governments and imperils social support. The answer to this tension lies in a balance between open markets and complementary domestic policies, along with international initiatives that manage the risks arising from globalization.

The sources of gains from trade

Turning more specifically to trade, the Report identifies different sources of economic gain from trade. These include the gains from exploiting relative efficiency through specialization and increased competition, increased product variety, realizing economies of scale, and increased productivity within industries. These insights and theories, dating from the late eighteenth century to the present day, have been subjected to extensive study and testing. Much of the theory has proven robust in terms of its basic insights regarding the gains from trade, although some of the empirical testing has brought out more nuanced conclusions.

In addition to this static analysis, which compares the situation before and after a given change, a growing body of literature has identified dynamic gains from change. International trade can affect the growth process through its effect on the accumulation of capital and on technological change. Classical growth theory focuses on the effect of trade on capital accumulation via its impact on the prices of factors of production and products. The nature of trade taking place is therefore key in determining how trade affects growth. By contrast, an analytical framework that focuses on the determinants of technological progress yields different, and sometimes conflicting, conclusions on the relationship between trade and growth. Some studies suggest that the removal of trade barriers could under particular circumstances encourage specialization in sectors with low growth potential. But this conclusion is challenged by studies that capture mechanisms that associate more open trade with higher growth. Such mechanisms include increased market size, knowledge spillovers, greater competition, and improvements in the domestic institutional framework. While some studies have pointed to possible offsetting effects, many others establish strong links between growth and trade. These studies do not, however, mean that more trade means more growth. Work continues on the causal direction and true causes of this observed relationship.

The location of production and the organization of firms

The Report also examines the determinants of the location of production within the world economy. Work on the so-called new “economic geography” and offshoring explains the location decisions of firms and why they sometimes choose to spread their production processes across different countries. Falling trade costs — as a result of trade-opening, trade facilitation and new technologies — can help to explain both why firms may concentrate geographically (agglomeration) and why they might break up the supply chain across different locations (fragmentation). The economic geography literature makes three important predictions. First, countries will tend to export products for which there is a large domestic market (the home market effect). The domestic market allows increasing returns to scale to operate, establishing a base for exports. At the same time, agglomeration permits various kinds of productivity “spillovers” to strengthen the competitive position of firms. Second, the home market effect will be amplified by falling trade costs, at least in the first instance (the magnification effect). Third, while falling trade costs will result in an initial period when manufacturing is concentrated in the “core”, with the “periphery” specializing in non-manufactures, further reductions in trade costs, along with emerging limits to the advantages of agglomeration, will eventually reverse this process and lead to a dispersion of manufacturing activity.

Available evidence suggests that offshoring is on the rise, driven by declines in the absolute costs of trading goods and services and advances in telecommunications technology. Recent work points to other factors, besides the traditional elements typically associated with comparative advantage, that also influence the evolution of production fragmentation. These include the quality of institutional frameworks, the costs of establishing a business and the quality of infrastructure. For these reasons, low-income countries may be at a significant disadvantage when it comes to participation in international production networks.

The distributional consequences of trade

The Report also examines the distributional consequences of trade — a major aspect of the tension detectable in public attitudes towards globalization and trade. Studies have attempted to disentangle the various elements of economic change that increase inequality. Much points to a significant effect arising from technological change, which raises productivity and wages among skilled workers, leaving the relatively unskilled behind. But trade may also play a role, where demand for unskilled workers in richer countries falls as a result of specialization through trade with lower-income countries where skill levels are on average lower than in rich countries.

In the case of developing countries, one might have expected that trade would reduce both poverty and inequality through positive effects on growth and income distribution. But evidence suggests that trade liberalization has not always gone hand in hand with reductions in inequality. Empirical evidence suggest that this is partly due to trade liberalization triggering technological change. The timing of trade policy change, the pre-existing level of protection and a range of factors relating to such factors as the structure and functioning of markets and basic infrastructure may also play a part.

In considering the relationship between trade and poverty, the Report notes that trade reform can help to alleviate poverty, which is one of the biggest challenges facing the world community today. Even though most of the literature concludes that trade has helped to reduce poverty on average, not all poor households have been able to take advantage of this. The relationship is complex, since trade affects growth, employment, revenue, consumer prices and government spending, all of which are factors entering the calculus of income effects upon households.

The social consequences of trade opening

Opening to trade implies adjustment, with some workers losing their jobs in import-competing firms that seek out efficiency gains, contract in order to survive, or simply fold. Exporting firms, on the other hand, may grow after a trade reform. A policy challenge of managing change will nevertheless remain. In many countries, policies are in place to assist displaced workers. Adjustment policies aimed specifically at trade have not always proved successful, in part because it is frequently difficult to distinguish in a meaningful way among various potential reasons for job losses. Trade-specific adjustment programmes may nevertheless be attractive in order to help sell nationally beneficial trade-opening policies. In countries where general social protection is available, trade-specific programmes may be harder to justify, but in developing countries that lack general social protection, such specificity may make more sense. More research and experimentation is needed to identify the most effective means of addressing the adverse social consequences of desirable economic change.

Global integration and international cooperation

Despite continuing gaps in our knowledge and understanding, the theoretical and empirical case for the gains from trade is strong. But certain factors have the potential to reduce those gains or to skew their distribution. The final section of the Report contemplates how international cooperation, including through the WTO, may help to mitigate the adverse effects of these factors. In addressing trade costs and supply constraints that diminish potential gains from trade, much depends in the first instance on national policy action. Public investment to enhance physical infrastructure is key, as is a willingness to lower trade costs through trade and regulatory reform.

But international cooperation can also make a big difference. In the context of the WTO, including the ongoing Doha Round, trade opening, actions to reduce trade costs, and the implementation of multilateral agreements can all contribute to enhanced opportunities to gain from trade. The market access negotiations in agriculture and non-agricultural market access (NAMA) offer the possibility of coordinated trade opening, where governments gain from both their own reduced trade costs and those of others. The trade facilitation negotiations focus on a particular set of trade costs. The Aid for Trade initiative helps developing countries to build supply capacity and to reduce other constraints on trade. Technical assistance also offers opportunities for strengthening the ability of governments to manage trade policy in ways that will enhance national competitiveness. Finally, technology can be spread through trade, by making technologically more sophisticated intermediate goods available for production, by a process of learning and adaptation to new technologies conveyed through trade, and through person-to-person communication associated with trading relationships. Technology transfer and diffusion can be enhanced through international cooperation, accompanied by appropriate property rights in order to ensure that technologies are developed which are suited to the domestic environment.

The World Trade Report can be downloaded free of charge from the WTO web site. Printed copies in English, French and Spanish can be purchased from the WTO online bookshop.

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