Growing Threats to Global Trade
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- Authors: PINELOPI GOLDBERG, TRISTAN REED
- Published: June 1, 2023
Overview and central finding
- Protectionism could make the world less resilient, more unequal, and more conflict-prone.
- There is still no conclusive evidence that international trade is deglobalizing: when measured in US dollars, global trade growth slowed after the global financial crisis in 2008–09, declined sharply at the onset of the pandemic in 2020, and then rebounded to the highest value ever.
- As a share of GDP, global trade has fallen modestly, driven mostly by China and India.
Evidence on trade trends and reallocations
- China has pursued a “dual circulation” strategy of prioritizing domestic consumption while remaining open to international trade and investment.
- Imports of intermediates as a share of GDP are falling for China and India, while imports of intermediates by the rest of the world are still growing; the same is true of exports.
- American and Chinese tariffs introduced in 2018:
- Curb trade between the US and China as expected.
- Did not reduce overall trade in affected products; trade in those products grew among the rest of the world—trade was reallocated, not reduced.
- During the COVID-19 pandemic many countries temporarily restricted exports of medicines and some halted shipments of wheat and other foods as prices spiked following Russia’s invasion of Ukraine.
- Despite episodic restrictions, many governments continue to pursue economic integration (for example, by easing professional mobility and harmonizing safety standards).
- Survey evidence on shifting economist views:
- In March 2018, 100 percent of those surveyed were against the initial US tariffs.
- In January 2022, only 2 out of 44 economists disagreed with the statement that reliance on foreign inputs had made American industries vulnerable to disruptions.
Three phases of the deglobalization movement
- Phase 1 — Global backlash (around 2015 onward):
- Political reactions to globalization and competition from low-wage countries produced Brexit, US tariffs, China’s retaliation, and a resurgence of extremist views in Europe.
- Distributional effects: many workers in advanced economies did worse than their parents; spatial patterns of industrialization meant communities exposed to import competition suffered more.
- Policy response consensus among mainstream economists: reject protectionism and endorse redistribution from winners to losers.
- Phase 2 — Pandemic pressures (2020 onset):
- Calls for resilience rose amid supply and demand disruptions from COVID.
- Markets proved resilient in many cases; example: US imports of medical goods remained diversified and face-mask shortages were alleviated within months as shipments from China arrived.
- Quantitative model evidence (cited) shows international trade increases diversification and resilience because supply shocks are less correlated across economies than within them.
- Short-term narratives about fragile supply chains reinforced protectionist sentiment but initial effects were not enduring; trade grew fast in 2021.
- Phase 3 — Geopolitical pressures (beginning February 2022):
- Russia’s invasion of Ukraine highlighted risks from specialization in critical inputs (for example, European gas dependence).
- Concerns about decoupling from China gained traction; policymakers began to consider unilateral decoupling.
- US export bans on advanced logic and memory chips and related machinery illustrate a move to foreclose technology access—affecting both military and civilian technological development.
- Two broad possible outcomes:
- Interventions limited to products with a credible dual use while trade in other products continues.
- Fragmentation into rival camps, potentially a new cold war between the US and China and their allies, with severe consequences.
Risks from fragmentation and a “new cold war”
- Innovation and R&D losses:
- If scientific collaboration between China and the US breaks down, the world could have fewer solutions to future pandemics and endemic diseases.
- Decarbonization and technology costs:
- Separating from “non-friendly” partners removes potential low-cost suppliers; example: solar panels cost substantially more in the West than in China, and industry estimates suggest tariffs have slowed installation.
- Delays in climate action are costly: “Every year lost results in more damage and substantially larger mitigation costs.”
- Resilience trade-offs:
- Restricting global trade is unlikely to lead to greater resilience universally; resilience depends on the specific shock considered.
- Trade exclusively with “friendly” countries may increase resilience to geopolitical risks in the near term but can reduce resilience to other shocks (for example, health shocks).
- Inequality and development:
- Within countries: greater trade barriers lead to higher prices and lower real wages, likely worsening inequality.
- Across countries: geoeconomic fragmentation risks increased global inequality; higher environmental and labor standards in trade agreements can raise entry barriers for very poor countries, undermining poverty reduction pathways.
- Risk to peace:
- Cold wars have often led to hot wars historically; interwar trade fragmentation in the 1930s exacerbated tensions ahead of World War II.
Policy implications and recommendations (as presented)
- Economists’ general stance: reject protectionism and endorse redistribution from winners to losers to address distributional harms of globalization.
- Limit interventions that foreclose technology access to products with credible dual use to avoid unnecessarily retarding civilian technological development.
- Preserve and pursue economic integration where feasible (for example, professional mobility and harmonized consumer safety standards) to sustain trade benefits and resilience.
- Recognize that resilience must be evaluated relative to specific shocks; broad decoupling is unlikely to be a reliable path to resilience across all shock types.
- Be mindful that policies raising entry barriers in trade (environmental and labor standards) can impede development in very poor countries and worsen global inequality.
F&D Magazine — “Growing Threats to Global Trade,” Pinelopi K. Goldberg and Tristan Reed, June 2023.
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