## INTERSECTING PATHS

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### Overview: technology, trade, and politics
- Technological change and international trade combine to accelerate innovation, technology adoption, and economic growth, but can also polarize outcomes both within and between countries.
- Geopolitics intensifies trade and technology tensions: trade can be a conduit for game-changing innovations but also poses risks of sharing trade secrets with foreign adversaries.
- Policy tradeoffs: protectionist responses (trade barriers, export controls, industrial policies) can address security and distributional concerns but risk distorting resource allocation, slowing diffusion, and reducing incentives for innovation.

### Technology, trade, development
- Technological advances create:
  - New goods (example: electric vehicles; smart‑phones and flat‑screen TVs displacing flip phones and cathode‑ray tube TVs).
  - New processes (example: automation and 3D printing) that increase production efficiency, reduce real prices, and spur production and exports from innovating countries.
  - New modes of transportation/communication (example: containerization; instant data transmission over the internet) that facilitate trade.
- Trade influences technological change by:
  - Creating a larger market with more intense competition.
  - Enabling frontier firms with global access to expand profits and invest in research and development.
- Developmental implications:
  - Overall effect of trade and technology on development is positive because technologies improve productivity and expand trade, and trade spreads technologies more rapidly worldwide.
  - There are winners and losers: those locked into outdated technologies or excluded from global markets (because of politics, geography, or infrastructure) will lag further behind the global frontier.
  - Concern for developing economies: automation in advanced economies can threaten simple stages of production that low‑income countries specialize in, though scale effects of automation often increase demand for imported parts and components (example: robotization in automobile production has coincided with an increase in imported parts and components from low‑income countries).
  - Telecommunications innovation (the internet) enables businesses to find distant suppliers and opens new areas of trade, particularly digital services.

### The political response
- Historical responses:
  - Trade barriers have been used to protect industries losing competitiveness (example: 1970s and 1980s technological advancement in Japan prompted the US to manage trade by restricting imports and promoting exports).
  - Intellectual property protection has primarily been sought by rich countries to protect proprietary technologies and profits rather than national security.
- Recent policy shifts:
  - Export controls on scarce materials, machines to make high‑tech products, and high‑tech goods themselves are being used to slow technological advancement in foreign countries.
  - Such interventions intentionally depress global growth and innovation by slowing trade and technology transmission and reduce profits and funds for high‑tech R&D.
  - New trade restrictions can particularly harm environmental goods and green innovation: global innovation and falling prices accelerate adoption of renewables (example: solar panels and batteries leading to less coal, gas, and oil burned).
- Risks of overreach:
  - Broad protective measures risk backfiring (example: export controls on advanced chips and production tools could cause the US to lose its edge in design due to smaller market share and shifting incentives abroad, potentially increasing security risks).
  - Tariffs and reciprocal measures between major economies (example: the United States and China) are slowing growth in the two largest global economic engines and hurting global innovation.

### The way forward: policy recommendations
- Social protection and adjustment:
  - Stronger social safety nets are essential to address people left behind by trade and technological change.
  - Governments can promote trade and technology while using proceeds to support negatively affected people and places.
  - Specific measures: unemployment insurance and retraining programs are critical to keeping trade open and free.
- Balancing openness and security:
  - Leverage trade and technology to address existential threats (pandemics, natural disasters, climate change) while managing security risks.
  - Global partnerships and trade facilitated rapid development and distribution of COVID vaccines (noting uneven access).
  - Critical supply chains examples: semiconductors (designed largely in the US, produced mostly in Asia); electric vehicle batteries (require cobalt, lithium, and nickel sourced primarily from Africa and South America).
- Policy prescriptions to sustain growth and innovation:
  - Protect only products genuinely threatened by technology; expand and deepen integration with trusted partners.
  - Encourage business entry and expansion via a good investment climate, sound infrastructure, and access to finance to stay at the forefront of innovation.
  - Maintain open trade and predictable, rules‑based policies to allocate resources productively and attract production relocating away from China.
  - Avoid widespread state intervention, protectionism, and heavy industrial policy; instead preserve predictability, trade openness, and access to capital.
- Warning about contagion and escalation:
  - Protectionism and subsidies are contagious: tariffs lead to retaliation; government support for specific firms or industries encourages foreign competitors to seek similar support.
  - A global spiral of protectionism and subsidies would reverse progress on raising global incomes and addressing pressing challenges.

*Caroline Freund, dean and professor of economic policy at the University of California, San Diego, School of Global Policy and Strategy. June 2023.*

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_Source: https://www.imf.org/-/media/files/publications/fandd/article/2023/june/freund.pdf_