## Intersecting Paths

## Source details

**Canonical URL:** [Intersecting Paths](https://www.imf.org/en/publications/fandd/issues/2023/06/intersecting-paths-caroline-freund)

## Other formats

- [Markdown version](/en/publications/fandd/issues/2023/06/intersecting-paths-caroline-freund/index.md)
- [Structured JSON version](/en/publications/fandd/issues/2023/06/intersecting-paths-caroline-freund/index.json)
- [Bundle manifest](/en/publications/fandd/issues/2023/06/intersecting-paths-caroline-freund/bundle-manifest.json)

## 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**
  - [Intersecting Paths (Markdown version)](/-/media/files/publications/fandd/article/2023/june/freund.pdf.md){rel="alternate" type="text/markdown"}
  - [Intersecting Paths (PDF)](/-/media/files/publications/fandd/article/2023/june/freund.pdf){rel="external" type="application/pdf"}

---

_Source: https://www.imf.org/en/publications/fandd/issues/2023/06/intersecting-paths-caroline-freund_