The Trade-Offs and Unequal Benefits of Trade Liberalization

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As a result, Japan found success in the automotive industry, becoming the world’s largest car manufacturer in 1981, with production accounting for almost a third of the global total. In China, South Korea and Taiwan, modern microchips — used in virtually every electronic device — became a production staple, and technological developments during the early part of the 21st century have only further entrenched the role of tech manufacturing in the growth of these economies. High-income economies were also strong advocates — and indeed beneficiaries — of trade liberalization in its early stages. During the 1990s, exports accounted for almost a quarter of the United States’ growth in output.

One of the key channels through which international trade impacts economic growth is through its indirect impacts on productivity across domestic firms. As Ana Cecilia Fieler, affiliate of the Yale Economic Growth Center (EGC), has found in her work with co-authors examining manufacturing and trade in Brazil (see a summary of her research here), LMIC-based firms that are engaged in international trade are more likely to upgrade their technology given the nature of demand from foreign customers. This has important indirect effects on economy-wide productivity, since this leads many non-importing firms to upgrade their technology as well, just due to the fact of being in the same supply chains as firms that are importing and exporting. These firm-to-firm benefits, in combination with factors such as human capital investments and support for small and medium-sized firms, differentiate the trade and growth experiences of regions such as Latin America from that of East Asia.



However, while the global economy may have benefitted overall from trade liberalization, this growth has not been spread equally. Specific localities and groups of workers have gained at the expense of others. These disequalizing effects have not just been concentrated in high-income countries but have played out in low-income ones as well. As a result, despite globalization seemingly catalyzing overall growth in both high- and low-income economies, the argument started to gain traction that it was moving wage jobs that required a high school degree or less from high- to low-wage countries. While this debate continues, the geographic and local effects of globalization (also known as “spatial effects” in the literature) have become more apparent. Borderless company activity due to international trade means that communities which depend on a single dominant employer lose out on more than just jobs if operations are moved abroad. There are also broader local effects and knock-on implications for tax raising, spending on public services and social divisions, which australia whatsapp number data can leave entire communities in distress, and feeling as if they have been harmed more than helped by the forces of globalization.

Recent research has shown that these imbalances in who gains and who loses from trade expansion are similarly apparent in low- and middle-income economies. A recent literature review by Amit Khandelwal, affiliate of the EGC and David Atkin at MIT found that since the vast majority of firms in low-income countries are not only small but also informal, the ability of these firms and their communities to receive the full benefits of trade is much more limited than previously imagined. This is apparent in the case of Vietnam, where lower U.S. tariffs on exports as a result of the U.S.-Vietnam Bilateral Trade Agreement led to increases in Vietnamese firm productivity. However, these gains came from the reallocation of resources, from smaller firms that were less efficient to larger companies that were more efficient. These smaller enterprises faced barriers to participating in the export market, which included substantial costs, such as government registration fees and insurance and shipping expenses, that small firms were too credit-constrained to overcome.