Can countries still trade their way out of poverty? After decades of growing twice as fast as the global economy, world trade has barely kept up with output since 2012. IMF and World Bank research suggests this slowdown is more than just a temporary consequence of sluggish demand within Europe. In both China and the US, the ratio of imports to GDP stopped rising well before the great recession.
Market conditions do not appear to favour a renewed trade boom. In all advanced economies, income is well below pre-crisis trend lines. There is no sign the US, the best of a bad lot, wants to – or should – resume its role as the global consumer of first resort. China’s economy, the world’s main motor since the crisis, is cooling.
US economist Paul Krugman views the trade slowdown as the untroubling aftermath of one-off boosts from liberalisation and shipping containerisation. But other economists, such as Gavyn Davies, fear plateauing trade means forgoing the efficiency gains that come with increased specialisation and scale. For poor countries, in either case, the implications of what the Financial Times dubbed “peak trade” are sobering.
Trade-led growth is the most successful development strategy the world has seen. Trading in value-added goods and services has improved resource allocation within countries’ economies, from Japan to Brazil, Botswana to Malaysia. In developing countries, tradable activities tend to be much more productive than the rest of the economy. As a result, getting people and capital out of subsistence work and into firms dealing in tradable goods and services tends to make for a more productive economy overall.
All countries that have sustained high growth long enough for it to transform people’s life prospects have used the burgeoning global marketplace as a source of demand, ideas and technology. So what happens when the global marketplace is no longer booming?
The IMF and World Bank findings indicate that the phenomenon that drove the especially rapid expansion of trade in the 1990s – the fragmentation of international production into multi-country supply chains across east Asia and the Pacific – has largely matured. Coastal Chinese firms are increasingly sourcing components from the country’s poorer interior, instead of importing them as they used to. This has caused trade volumes to fall.
But not all the news is bad. While the US-China engine of trade growth “appears to have exhausted its propulsive energy for now”, the researchers found considerable scope for increasing the international division of labour in regions such as south Asia, Latin America and especially Africa, areas that have not yet made the most of supply chains.
In today’s less buoyant global environment, however, seizing these underexploited opportunities will be harder than ever.
The new World Trade Organisation agreement on trade facilitation (pdf) should help with some of the more obvious reforms: bad infrastructure and interminable waits at borders have made much of Africa, despite low wage levels, a high-cost location for labour-intensive light manufacturing. Other reforms extend beyond infrastructure. Many countries, for instance, still have considerable scope to cut import duties on inputs and equipment, and to open their telecommunications and logistics sectors to greater competition. Regional economic integration would help firms find markets close to home: research by the International Trade Centre (pdf), which I run, shows that African exports often face higher trade barriers in neighbouring countries than they do elsewhere.
Other interventions are more complicated: enabling entrepreneurs based outside established centres of production to connect to new customers and markets is easier said than done. Such entrepreneurs need access to capital and trade finance, technical assistance to meet standards and other non-tariff measures, and a supportive policy climate.
Matching international buyers to small and medium-sized sellers can yield impressive gains that are disproportionate to the volumes of trade involved. These gains may be especially pronounced when those firms are owned by women, who reinvest 90% of their incomes in their families and communities, more than twice as much as men do. Risk-sharing for small- and medium-sized companies that try to enter new export markets, or supply to international supply chains, would encourage companies to keep trying.
Some of these policies are unfashionable. Some have been misused in the past. We should admit that some will fail. But the potential gains are enormous: growth and job creation in the parts of the world that most need it, and new markets for rich countries and companies facing diminished sales growth along established value chains.
Integrating marginalised economies into international production networks requires governments, trade policymakers, the private sector and the aid community to work in concert. The UN’s new development agenda could do for trade what the last one did for public health, and stimulate new thinking, funds and cooperation to help marginalised economies thrive in world markets.
A hard-nosed focus on trade competitiveness should keep trade and investment promotion efforts from derailing. With the low-hanging fruit of trade-led development dwindling, it is time for us to look higher.
• Arancha González is executive director of the International Trade Centre, the joint agency of the UN and the World Trade Organisation
