Intersecting Paths
Source details
- Canonical URL
- Intersecting Paths
Other formats
Bibliographic details
- Authors: CAROLINE FREUND
- Published: June 1, 2023
Overview
- Advances in technology affect trade and vice versa.
- Technological change is described as both "exciting and scary," empowering higher productivity while creating fears of job loss.
- International trade similarly drives growth but generates anxiety because domestic workers associate their losses directly with gains for foreign workers.
- When technological change and international trade combine, they can accelerate innovation, technology adoption, and economic growth, while also becoming polarizing forces within and between countries.
- Geopolitics intensifies tensions as countries jostle for position on the technological frontier; trade becomes a conduit for transferring game-changing innovations but also raises risks of sharing trade secrets with foreign adversaries.
- Policy choices are influenced by these pressures, with trade barriers, industrial policies, and export controls used at times despite potential negative effects on growth and resource allocation.
Technology and Trade Interactions
- Technological advances create:
- New goods (example: electric vehicles; smartphones and flat-screen TVs displacing flip phones and cathode-ray tube TVs).
- New processes (example: automation and 3D printing) that increase production efficiency and reduce real prices.
- New modes of transportation and communication (example: containerization; instant data transmission over the internet).
- Trade effects:
- New goods spur greater demand and overall trade tends to increase.
- Adoption of new processes can drive surges in production and exports from innovating countries.
- Automation in advanced economies has coincided with an increase in imported parts and components from low-income countries (example: automobile production).
- Telecommunications innovation and the internet enable businesses to find distant suppliers and open new areas of trade, particularly digital services.
- Reciprocal influence:
- Trade creates larger markets and more intense competition, enabling frontier firms to expand profits and invest in research and development, accelerating innovation.
- Competition from global leaders incentivizes firms to stay at the forefront of technological advancement.
- Aggregate outcome:
- The overall effect of trade and technology on development is positive because new technologies improve productivity and expand trade, and trade enables faster diffusion of technologies worldwide.
- Distributional consequences:
- Winners and losers emerge; those locked into outdated technologies fall behind.
- Countries excluded from global markets due to politics, geography, or infrastructure will lag further behind the global frontier.
Effects on Development and Environment
- Development:
- Countries specialized in simple stages of production that may be automated risk falling demand for their exports, but scale effects of automation typically increase need for imported parts.
- Trade-enabled diffusion of technology further promotes growth.
- Environment and green innovation:
- New trade restrictions can be particularly detrimental to environmental goods and green innovation.
- The shift to renewables will be quicker if innovation is global and prices fall rapidly.
- Greater access at lower prices to products such as solar panels and batteries will mean less coal, gas, and oil will be burned.
Political Responses and Trade Policy
- Historical examples:
- In the 1970s and 1980s, technological advancement in Japan led to cheaper and better cars and semiconductors, prompting the US to manage trade by restricting imports and promoting exports.
- Intellectual property protection historically sought primarily by rich countries to protect proprietary technologies and profits rather than national security.
- Contemporary tools and consequences:
- Export controls on scarce materials, production machines, and high-tech goods are used to slow technological advancement in foreign countries.
- Such interventions depress global growth and innovation by design, slowing trade and transmission of technology.
- Reduced exports of high-tech products imply slower profit growth and less funding for research and development in high-tech industries.
- Geopolitics and trade:
- The United States has tariffs on most imports from China and regulates a growing share of exports; China has responded in kind.
- These tariffs are slowing growth in the two largest global economic engines and hurting global innovation.
- Contagion and escalation risks:
- Tariffs lead to retaliation, breeding ever more tariffs.
- Government support for particular firms or industries disadvantages foreign competitors, prompting them to lobby for similar support.
- Protectionism and subsidies spiraling out of control would reverse progress on raising global incomes and addressing global challenges.
Policy Prescriptions and the Way Forward
- Domestic safety nets and adjustment policies:
- Stronger social safety nets are required to address people left behind by trade and technological change.
- Governments can promote trade and technology while using proceeds to support those negatively affected.
- Unemployment insurance and retraining programs are critical to keeping trade open and free.
- Balancing security and openness:
- The complex question is how to leverage trade and technology to address existential threats (pandemics, natural disasters, climate change) without risking domestic security.
- Innovation plus international trade and cooperation are essential tools for mitigation but carry security risks.
- Targeted protection over broad measures:
- Growth and innovation would benefit from government protection only of products threatened by technology, along with continued expansion and deeper integration with trusted partners.
- Overreach in export controls (example: on advanced chips and tools to produce them) could reduce the US edge in design through smaller market share and shifted incentives abroad, potentially increasing security risks.
- Pro-growth policy fundamentals:
- Countries that encourage business entry and expansion with a good investment climate, sound infrastructure, and access to finance will remain at the forefront of innovation.
- Open trade and predictable policies will continue to push resources into their most productive uses.
- As some production relocates away from China, countries that adhere to such policies stand to benefit.
- Avoiding excessive state intervention:
- All countries must avoid the false attraction of widespread state intervention.
- China’s remarkable economic growth over the past 30 years was driven by reforms that stimulated private industry; current overestimation of public sector steering capacity is cautioned against.
- Rather than protectionism and industrial policies, maintaining predictability, a rules-based system, trade openness, and access to capital are recommended.
Risks, Trade-offs, and Strategic Considerations
- Trade-offs:
- Protectionist measures (tariffs, export controls, industrial policies) can protect specific industries short-term but risk distorting domestic resource allocation and stimulating investment abroad.
- Export controls and trade restrictions can slow global diffusion of technologies needed for development and climate mitigation.
- Strategic insecurity:
- Geopolitical competition can fragment technological diffusion and slow global growth.
- Overly broad export controls may erode design leadership in producer countries by shrinking market share and altering incentives.
- Opportunities for nonaligned or open economies:
- Countries not caught in major-power conflict that maintain open, predictable, and pro-investment policies can attract relocated production and advance on the technological frontier.
Source: Intersecting Paths, F&D Magazine — CAROLINE FREUND
Content in this bundle
- Intersecting Paths