research about international trade

Trade and Globalization

How did international trade and globalization change over time? What is the structure today? And what is its impact?

By: Esteban Ortiz-Ospina , Diana Beltekian and Max Roser

This page was first published in 2014 and last revised in April 2024.

On this topic page, you can find data, visualizations, and research on historical and current patterns of international trade, as well as discussions of their origins and effects.

Other research and writing on trade and globalization on Our World in Data:

• Is globalization an engine of economic development?
• Is trade a major driver of income inequality?

Related topics

Economic Growth

See all our data, visualizations, and writing on economic growth.

Economic Inequality

See all our data, visualizations, and writing on economic inequality.

See all our data, visualizations, and writing on migration.

See all interactive charts on Trade and Globalization ↓

Trade has changed the world economy

Trade has grown remarkably over the last century.

One of the most important developments of the last century has been the integration of national economies into a global economic system. This process of integration, often called globalization, has resulted in a remarkable growth in trade between countries.

The chart here shows the growth of world exports over more than the last two centuries. These estimates are in constant prices (i.e. have been adjusted to account for inflation) and are indexed at 1913 values.

The chart shows an extraordinary growth in international trade over the last couple of centuries: Exports today are more than 40 times larger than in 1913.

You can switch to a logarithmic scale under ‘Settings’. This will help you see that, over the long run, growth has roughly followed an exponential path.

The increase in trade has even outpaced economic growth

The chart above shows how much more trade we have today relative to a century ago. But what about trade relative to total economic output?

Over the last couple of centuries the world economy has experienced sustained positive economic growth , so looking at changes in trade relative to GDP offers another interesting perspective.

The next chart plots the value of traded goods relative to GDP (i.e. the value of merchandise trade as a share of global economic output).

Up to 1870, the sum of worldwide exports accounted for less than 10% of global output. Today, the value of exported goods around the world is around 25%. This shows that over the last hundred years, the growth in trade has even outpaced rapid economic growth.

Trade expanded in two waves

The first "wave of globalization" started in the 19th century, the second one after ww2.

The following visualization presents a compilation of available trade estimates, showing the evolution of world exports and imports as a share of global economic output .

This metric (the ratio of total trade, exports plus imports, to global GDP) is known as the “openness index”. The higher the index, the higher the influence of trade transactions on global economic activity. 1

As we can see, until 1800 there was a long period characterized by persistently low international trade – globally the index never exceeded 10% before 1800. This then changed over the course of the 19th century, when technological advances triggered a period of marked growth in world trade – the so-called “first wave of globalization”.

This first wave came to an end with the beginning of World War I, when the decline of liberalism and the rise of nationalism led to a slump in international trade. In the chart we see a large drop in the interwar period.

After World War II trade started growing again. This new – and ongoing – wave of globalization has seen international trade grow faster than ever before. Today the sum of exports and imports across nations amounts to more than 50% of the value of total global output. 2

Before the first wave of globalization, trade was driven mostly by colonialism

Over the early modern period, transoceanic flows of goods between empires and colonies accounted for an important part of international trade. The following visualizations provide a comparison of intercontinental trade, in per capita terms, for different countries.

As we can see, intercontinental trade was very dynamic, with volumes varying considerably across time and from empire to empire.

Leonor Freire Costa, Nuno Palma, and Jaime Reis, who compiled and published the original data shown here, argue that trade, also in this period, had a substantial positive impact on the economy. 3

The first wave of globalization was marked by the rise and collapse of intra-European trade

The following visualization shows a detailed overview of Western European exports by destination. Figures correspond to export-to-GDP ratios (i.e. the sum of the value of exports from all Western European countries, divided by the total GDP in this region). You can use “Settings” to switch to a relative view and see the proportional contribution of each region to total Western European exports.

This chart shows that growth in Western European trade throughout the 19th century was largely driven by trade within the region: In the period 1830-1900 intra-European exports went from 1% of GDP to 10% of GDP, and this meant that the relative weight of intra-European exports doubled over the period. However, this process of European integration then collapsed sharply in the interwar period.

After the Second World War trade within Europe rebounded, and from the 1990s onwards exceeded the highest levels of the first wave of globalization. In addition, Western Europe then started to increasingly trade with Asia, the Americas, and to a smaller extent Africa and Oceania.

The next graph, using data from Broadberry and O'Rourke (2010) 4 , shows another perspective on the integration of the global economy and plots the evolution of three indicators measuring integration across different markets – specifically goods, labor, and capital markets.

The indicators in this chart are indexed, so they show changes relative to the levels of integration observed in 1900. This gives us another perspective on how quickly global integration collapsed with the two World Wars. 5

The second wave of globalization was enabled by technology

The worldwide expansion of trade after the Second World War was largely possible because of reductions in transaction costs stemming from technological advances, such as the development of commercial civil aviation, the improvement of productivity in the merchant marines, and the democratization of the telephone as the main mode of communication. The visualization shows how, at the global level, costs across these three variables have been going down since 1930.

Reductions in transaction costs impacted not only the volumes of trade but also the types of exchanges that were possible and profitable.

The first wave of globalization was characterized by inter-industry trade. This means that countries exported goods that were very different from what they imported – England exchanged machines for Australian wool and Indian tea. As transaction costs went down, this changed. In the second wave of globalization, we are seeing a rise in intra -industry trade (i.e. the exchange of broadly similar goods and services is becoming more and more common). France, for example, now both imports and exports machines to and from Germany.

The following visualization, from the UN World Development Report (2009) , plots the fraction of total world trade that is accounted for by intra-industry trade, by type of goods. As we can see, intra-industry trade has been going up for primary, intermediate, and final goods.

This pattern of trade is important because the scope for specialization increases if countries are able to exchange intermediate goods (e.g. auto parts) for related final goods (e.g. cars).

Trade and trade partners by country

Above, we examined the broad global trends over the last two centuries. Let's now examine country-level trends over this long and dynamic period.

This chart plots estimates of the value of trade in goods, relative to total economic activity (i.e. export-to-GDP ratios).

These historical estimates obviously come with a large margin of error (in the measurement section below we discuss the data limitations); yet they offer an interesting perspective.

You can edit the countries and regions selected. Each country tells a different story. 7

In the next chart we plot, country by country, the regional breakdown of exports. India is shown by default, but you can edit the countries and regions shown.

When switching to displaying relative values under ‘Settings’, we see the proportional contribution of purchases from each region. For example, we see that more than a third of Indian exports went to Asian countries in recent decades.

This gives us an interesting perspective on the changing nature of trade partnerships. In India, we see the rising importance of trade with Africa—a pattern that we discuss in more detail below .

Trade around the world today

How much do countries trade, trade openness around the world.

The metric trade as a share of GDP gives us an idea of global integration by capturing all incoming and outgoing transactions of a country.

The charts shows that countries differ a lot in the extent to which they engage in trade. Trade, for example, is much less important to the US economy than for other rich countries.

If you press the play button on the map, you can see changes over time. This reveals that, despite the great variation between countries, there is a common trend: over the last couple of decades trade openness has gone up in most countries.

Exports and imports in real dollars

Expressing the value of trade as a share of GDP tells us the importance of trade in relation to the size of economic activity. Let's now take a look at trade in monetary terms – this tells us the importance of trade in absolute, rather than relative terms.

The chart shows the value of exports (goods plus services) in dollars, country by country.

The main takeaway here is that the trend towards more trade is more pronounced than in the charts showing shares of GDP. This is not surprising: most countries today produce more than a couple of decades ago , and at the same time they trade more of what they produce. 8

What do countries trade?

Trade in goods vs. trade in services.

Trade transactions include goods (tangible products that are physically shipped across borders by road, rail, water, or air) and services (intangible commodities, such as tourism, financial services, and legal advice).

Many traded services make merchandise trade easier or cheaper—for example, shipping services, or insurance and financial services.

Trade in goods has been happening for millennia , while trade in services is a relatively recent phenomenon.

In some countries services are today an important driver of trade: in the UK services account for around half of all exports; and in the Bahamas, almost all exports are services.

In other countries, such as Nigeria and Venezuela, services account for a small share of total exports.

Globally, trade in goods accounts for the majority of trade transactions. But as this chart shows, the share of services in total global exports has slightly increased in recent decades. 9

How are trade partnerships changing?

Bilateral trade is becoming increasingly common.

If we consider all pairs of countries that engage in trade around the world, we find that in the majority of cases, there is a bilateral relationship today: most countries that export goods to a country also import goods from the same country.

The interactive visualization shows this. 10 In the chart, all possible country pairs are partitioned into three categories: the top portion represents the fraction of country pairs that do not trade with one another; the middle portion represents those that trade in both directions (they export to one another); and the bottom portion represents those that trade in one direction only (one country imports from, but does not export to, the other country).

As we can see, bilateral trade is becoming increasingly common (the middle portion has grown substantially). However, many countries still do not trade with each other at all.

South-South trade is becoming increasingly important

The next visualization here shows the share of world merchandise trade that corresponds to exchanges between today's rich countries and the rest of the world.

The 'rich countries' in this chart are: Australia, Austria, Belgium, Canada, Cyprus, Denmark, Finland, France, Germany, Greece, Iceland, Ireland, Israel, Italy, Japan, Luxembourg, Netherlands, Norway, Portugal, Spain, Sweden, Switzerland, United Kingdom and the United States. 'Non-rich countries' are all the other countries in the world.

As we can see, up until the Second World War, the majority of trade transactions involved exchanges between this small group of rich countries. But this has changed quickly over the last couple of decades, and today, trade between non-rich countries is just as important as trade between rich countries.

In the past two decades, China has been a key driver of this dynamic: the UN Human Development Report (2013) estimates that between 1992 and 2011, China's trade with Sub-Saharan Africa rose from $1 billion to more than $140 billion. 11

The majority of preferential trade agreements are between emerging economies

The last few decades have not only seen an increase in the volume of international trade, but also an increase in the number of preferential trade agreements through which exchanges take place. A preferential trade agreement is a trade pact that reduces tariffs between the participating countries for certain products.

The visualization here shows the evolution of the cumulative number of preferential trade agreements in force worldwide, according to the World Trade Organization (WTO). These numbers include notified and non-notified preferential agreements (the source reports that only about two-thirds of the agreements currently in force have been notified to the WTO) and are disaggregated by country groups.

This figure shows the increasingly important role of trade between developing countries (South-South trade), vis-a-vis trade between developed and developing countries (North-South trade). In the late 1970s, North-South agreements accounted for more than half of all agreements – in 2010, they accounted for about one-quarter. Today, the majority of preferential trade agreements are between developing economies.

Trading patterns have been changing quickly in middle-income countries

An important change in the composition of exported goods in these countries has accompanied the increase in trade among emerging economies over the last half century.

The next visualization plots the share of food exports in each country's total exported merchandise. These figures, produced by the World Bank, correspond to the Standard International Trade Classification, in which 'food' includes, among other goods, live animals, beverages, tobacco, coffee, oils, and fats.

Two points stand out. First, the relative importance of food exports has substantially decreased in most countries since the 1960s (although globally, it has gone up slightly more recently). Second, this decrease has been largest in middle-income countries, particularly in Latin America.

Regarding levels, as one would expect, in high-income countries, food still accounts for a much smaller share of merchandise exports than in most low- and middle-income-countries.

Trade generates efficiency gains

The raw correlation between trade and growth.

Over the last couple of centuries, the world economy has experienced sustained positive economic growth , and over the same period, this process of economic growth has been accompanied by even faster growth in global trade .

In a similar way, if we look at country-level data from the last half century we find that there is also a correlation between economic growth and trade: countries with higher rates of GDP growth also tend to have higher rates of growth in trade as a share of output. This basic correlation is shown in the chart here, where we plot the average annual change in real GDP per capita, against growth in trade (average annual change in value of exports as a share of GDP). 12

Is this statistical association between economic output and trade causal?

Among the potential growth-enhancing factors that may come from greater global economic integration are: competition (firms that fail to adopt new technologies and cut costs are more likely to fail and be replaced by more dynamic firms); economies of scale (firms that can export to the world face larger demand, and under the right conditions, they can operate at larger scales where the price per unit of product is lower); learning and innovation (firms that trade gain more experience and exposure to develop and adopt technologies and industry standards from foreign competitors). 13

Are these mechanisms supported by the data? Let's take a look at the available empirical evidence.

Evidence from cross-country differences in trade, growth, and productivity

When it comes to academic studies estimating the impact of trade on GDP growth, the most cited paper is Frankel and Romer (1999). 14

In this study, Frankel and Romer used geography as a proxy for trade to estimate the impact of trade on growth. This is a classic example of the so-called instrumental variables approach . The idea is that a country's geography is fixed, and mainly affects national income through trade. So if we observe that a country's distance from other countries is a powerful predictor of economic growth (after accounting for other characteristics), then the conclusion is drawn that it must be because trade has an effect on economic growth. Following this logic, Frankel and Romer find evidence of a strong impact of trade on economic growth.

Other papers have applied the same approach to richer cross-country data, and they have found similar results. A key example is Alcalá and Ciccone (2004). 15

This body of evidence suggests trade is indeed one of the factors driving national average incomes (GDP per capita) and macroeconomic productivity (GDP per worker) over the long run. 16

Evidence from changes in labor productivity at the firm level

If trade is causally linked to economic growth, we would expect that trade liberalization episodes also lead to firms becoming more productive in the medium and even short run. There is evidence suggesting this is often the case.

Pavcnik (2002) examined the effects of liberalized trade on plant productivity in the case of Chile, during the late 1970s and early 1980s. She found a positive impact on firm productivity in the import-competing sector. She also found evidence of aggregate productivity improvements from the reshuffling of resources and output from less to more efficient producers. 17

Bloom, Draca, and Van Reenen (2016) examined the impact of rising Chinese import competition on European firms over the period 1996-2007 and obtained similar results. They found that innovation increased more in those firms most affected by Chinese imports. They also found evidence of efficiency gains through two related channels: innovation increased and new existing technologies were adopted within firms, and aggregate productivity also increased because employment was reallocated towards more technologically advanced firms. 18

Trade does not only increase efficiency gains

Overall, the available evidence suggests that trade liberalization does improve economic efficiency. This evidence comes from different political and economic contexts and includes both micro and macro measures of efficiency.

This result is important because it shows that there are gains from trade. But of course, efficiency is not the only relevant consideration here. As we discuss in a companion article , the efficiency gains from trade are not generally equally shared by everyone. The evidence from the impact of trade on firm productivity confirms this: "reshuffling workers from less to more efficient producers" means closing down some jobs in some places. Because distributional concerns are real it is important to promote public policies – such as unemployment benefits and other safety-net programs – that help redistribute the gains from trade.

Trade has distributional consequences

The conceptual link between trade and household welfare.

When a country opens up to trade, the demand and supply of goods and services in the economy shift. As a consequence, local markets respond, and prices change. This has an impact on households, both as consumers and as wage earners.

The implication is that trade has an impact on everyone. It's not the case that the effects are restricted to workers from industries in the trade sector; or to consumers who buy imported goods. The effects of trade extend to everyone because markets are interlinked, so imports and exports have knock-on effects on all prices in the economy, including those in non-traded sectors.

Economists usually distinguish between "general equilibrium consumption effects" (i.e. changes in consumption that arise from the fact that trade affects the prices of non-traded goods relative to traded goods) and "general equilibrium income effects" (i.e. changes in wages that arise from the fact that trade has an impact on the demand for specific types of workers, who could be employed in both the traded and non-traded sectors).

Considering all these complex interrelations, it's not surprising that economic theories predict that not everyone will benefit from international trade in the same way. The distribution of the gains from trade depends on what different groups of people consume, and which types of jobs they have, or could have. 19

The link between trade, jobs and wages

Evidence from chinese imports and their impact on factory workers in the us.

The most famous study looking at this question is Autor, Dorn and Hanson (2013): "The China syndrome: Local labor market effects of import competition in the United States". 20

In this paper, Autor and coauthors examined how local labor markets changed in the parts of the country most exposed to Chinese competition. They found that rising exposure increased unemployment, lowered labor force participation, and reduced wages. Additionally, they found that claims for unemployment and healthcare benefits also increased in more trade-exposed labor markets.

The visualization here is one of the key charts from their paper. It's a scatter plot of cross-regional exposure to rising imports, against changes in employment. Each dot is a small region (a 'commuting zone' to be precise). The vertical position of the dots represents the percent change in manufacturing employment for the working-age population, and the horizontal position represents the predicted exposure to rising imports (exposure varies across regions depending on the local weight of different industries).

The trend line in this chart shows a negative relationship: more exposure goes along with less employment. There are large deviations from the trend (there are some low-exposure regions with big negative changes in employment); but the paper provides more sophisticated regressions and robustness checks, and finds that this relationship is statistically significant.

This result is important because it shows that the labor market adjustments were large. Many workers and communities were affected over a long period of time. 21

But it's also important to keep in mind that Autor and colleagues are only giving us a partial perspective on the total effect of trade on employment. In particular, comparing changes in employment at the regional level misses the fact that firms operate in multiple regions and industries at the same time. Indeed, Ildikó Magyari found evidence suggesting the Chinese trade shock provided incentives for US firms to diversify and reorganize production. 22

So companies that outsourced jobs to China often ended up closing some lines of business, but at the same time expanded other lines elsewhere in the US. This means that job losses in some regions subsidized new jobs in other parts of the country.

On the whole, Magyari finds that although Chinese imports may have reduced employment within some establishments, these losses were more than offset by gains in employment within the same firms in other places. This is no consolation to people who lost their jobs. But it is necessary to add this perspective to the simplistic story of "trade with China is bad for US workers".

Evidence from the expansion of trade in India and the impact on poverty reductions

Another important paper in this field is Topalova (2010): "Factor immobility and regional impacts of trade liberalization: Evidence on poverty from India". 23

In this paper, Topalova examines the impact of trade liberalization on poverty across different regions in India, using the sudden and extensive change in India's trade policy in 1991. She finds that rural regions that were more exposed to liberalization experienced a slower decline in poverty and lower consumption growth.

Analyzing the mechanisms underlying this effect, Topalova finds that liberalization had a stronger negative impact among the least geographically mobile at the bottom of the income distribution and in places where labor laws deterred workers from reallocating across sectors.

The evidence from India shows that (i) discussions that only look at "winners" in poor countries and "losers" in rich countries miss the point that the gains from trade are unequally distributed within both sets of countries; and (ii) context-specific factors, like worker mobility across sectors and geographic regions, are crucial to understand the impact of trade on incomes.

Evidence from other studies

• Donaldson (2018) uses archival data from colonial India to estimate the impact of India’s vast railroad network. He finds railroads increased trade, and in doing so they increased real incomes (and reduced income volatility). 24
• Porto (2006) looks at the distributional effects of Mercosur on Argentine families, and finds this regional trade agreement led to benefits across the entire income distribution. He finds the effect was progressive: poor households gained more than middle-income households because prior to the reform, trade protection benefitted the rich disproportionately. 25
• Trefler (2004) looks at the Canada-US Free Trade Agreement and finds there was a group who bore "adjustment costs" (displaced workers and struggling plants) and a group who enjoyed "long-run gains" (consumers and efficient plants). 26

The link between trade and the cost of living

The fact that trade negatively affects labor market opportunities for specific groups of people does not necessarily imply that trade has a negative aggregate effect on household welfare. This is because, while trade affects wages and employment, it also affects the prices of consumption goods. So households are affected both as consumers and as wage earners.

Most studies focus on the earnings channel and try to approximate the impact of trade on welfare by looking at how much wages can buy, using as a reference the changing prices of a fixed basket of goods.

This approach is problematic because it fails to consider welfare gains from increased product variety, and obscures complicated distributional issues such as the fact that poor and rich individuals consume different baskets so they benefit differently from changes in relative prices. 27

Ideally, studies looking at the impact of trade on household welfare should rely on fine-grained data on prices, consumption, and earnings. This is the approach followed in Atkin, Faber, and Gonzalez-Navarro (2018): "Retail globalization and household welfare: Evidence from Mexico". 28

Atkin and coauthors use a uniquely rich dataset from Mexico, and find that the arrival of global retail chains led to reductions in the incomes of traditional retail sector workers, but had little impact on average municipality-level incomes or employment; and led to lower costs of living for both rich and poor households.

The chart here shows the estimated distribution of total welfare gains across the household income distribution (the light-gray lines correspond to confidence intervals). These are proportional gains expressed as a percent of initial household income.

As we can see, there is a net positive welfare effect across all income groups; but these improvements in welfare are regressive, in the sense that richer households gain proportionally more (about 7.5 percent gain compared to 5 percent). 29

Evidence from other countries confirms this is not an isolated case – the expenditure channel really seems to be an important and understudied source of household welfare. Giuseppe Berlingieri, Holger Breinlich, Swati Dhingra, for example, investigated the consumer benefits from trade agreements implemented by the EU between 1993 and 2013; and they found that these trade agreements increased the quality of available products, which translated into a cumulative reduction in consumer prices equivalent to savings of €24 billion per year for EU consumers. 30

Implications of trade’s distributional effects

The available evidence shows that, for some groups of people, trade has a negative effect on wages and employment opportunities; at the same time, it has a large positive effect via lower consumer prices and increased product availability.

Two points are worth emphasizing.

For some households, the net effect is positive. But for some households that's not the case. In particular, workers who lose their jobs can be affected for extended periods of time, so the positive effect via lower prices is not enough to compensate them for the reduction in earnings.

On the whole, if we aggregate changes in welfare across households, the net effect is usually positive. But this is hardly a consolation for the worse off.

This highlights a complex reality: There are aggregate gains from trade , but there are also real distributional concerns. Even if trade is not a major driver of income inequalities , it's important to keep in mind that public policies, such as unemployment benefits and other safety-net programs, can and should help redistribute the gains from trade.

Explaining trade patterns: Theory and Evidence

Comparative advantage, theory: what is 'comparative advantage' and why does it matter to understand trade.

In economic theory, the 'economic cost' – or the 'opportunity cost' – of producing a good is the value of everything you need to give up in order to produce that good.

Economic costs include physical inputs (the value of the stuff you use to produce the good), plus forgone opportunities (when you allocate scarce resources to a task, you give up alternative uses of those resources).

A country or a person is said to have a 'comparative advantage' if it can produce something at a lower opportunity cost than its trade partners.

The forgone opportunities of production are key to understanding this concept. It is precisely this that distinguishes absolute advantage from comparative advantage.

To see the difference between comparative and absolute advantage, consider a commercial aviation pilot and a baker. Suppose the pilot is an excellent chef, and she can bake just as well, or even better than the baker. In this case, the pilot has an absolute advantage in both tasks. Yet the baker probably has a comparative advantage in baking, because the opportunity cost of baking is much higher for the pilot.

The freely available economics textbook The Economy: Economics for a Changing World explains this as follows: "A person or country has comparative advantage in the production of a particular good, if the cost of producing an additional unit of that good relative to the cost of producing another good is lower than another person or country’s cost to produce the same two goods."

At the individual level, comparative advantage explains why you might want to delegate tasks to someone else, even if you can do those tasks better and faster than them. This may sound counterintuitive, but it is not: If you are good at many things, it means that investing time in one task has a high opportunity cost, because you are not doing the other amazing things you could be doing with your time and resources. So, at least from an efficiency point of view, you should specialize on what you are best at, and delegate the rest.

The same logic applies to countries. Broadly speaking, the principle of comparative advantage postulates that all nations can gain from trade if each specializes in producing what they are relatively more efficient at producing, and imports the rest: “do what you do best, import the rest”. 31

In countries with a relative abundance of certain factors of production, the theory of comparative advantage predicts that they will export goods that rely heavily upon those factors: a country typically has a comparative advantage in those goods that use its abundant resources. Colombia exports bananas to Europe because it has comparatively abundant tropical weather.

Is there empirical support for comparative-advantage theories of trade?

The empirical evidence suggests that the principle of comparative advantage does help explain trade patterns. Bernhofen and Brown (2004) 32 , for instance, provide evidence using the experience of Japan. Specifically, they exploit Japan’s dramatic nineteenth-century move from a state of near complete isolation to wide trade openness.

The graph here shows the price changes of the key tradable goods after the opening up to trade. It presents a scatter diagram of the net exports in 1869 graphed in relation to the change in prices from 1851–53 to 1869. As we can see, this is consistent with the theory: after opening to trade, the relative prices of major exports such as silk increased (Japan exported what was cheap for them to produce and which was valuable abroad), while the relative price of imports such as sugar declined (they imported what was relatively more difficult for them to produce, but was cheap abroad).

Trade diminishes with distance

The resistance that geography imposes on trade has long been studied in the empirical economics literature – and the main conclusion is that trade intensity is strongly linked to geographic distance.

The visualization, from Eaton and Kortum (2002), graphs 'normalized import shares' against distance. 33 Each dot represents a country pair from a set of 19 OECD countries, and both the vertical and horizontal axes are expressed on logarithmic scales.

The 'normalized import shares' in the vertical axis provide a measure of how much each country imports from different partners (see the paper for details on how this is calculated and normalized), while the distance in the horizontal axis corresponds to the distance between central cities in each country (see the paper and references therein for details on the list of cities). As we can see, there is a strong negative relationship. Trade diminishes with distance. Through econometric modeling, the paper shows that this relationship is not just a correlation driven by other factors: their findings suggest that distance imposes a significant barrier to trade.

The fact that trade diminishes with distance is also corroborated by data on trade intensity within countries. The visualization here shows, through a series of maps, the geographic distribution of French firms that export to France's neighboring countries. The colors reflect the percentage of firms that export to each specific country.

As we can see, the share of firms exporting to each of the corresponding neighbors is the largest close to the border. The authors also show in the paper that this pattern holds for the value of individual-firm exports – trade value decreases with distance to the border.

Institutions

Conducting international trade requires both financial and non-financial institutions to support transactions. Some of these institutions are fairly obvious (e.g. law enforcement); but some are less obvious. For example, the evidence shows that producers in exporting countries often need credit in order to engage in trade.

The scatter plot, from Manova (2013), shows the correlation between levels in private credit (specifically exporters’ private credit as a share of GDP) and exports (average log bilateral exports across destinations and sectors). 35 As can be seen, financially developed economies – those with more dynamic private credit markets – typically outperform exporters with less evolved financial institutions.

Other studies have shown that country-specific institutions, like the knowledge of foreign languages, for instance, are also important to promote foreign relative to domestic trade. 36

Increasing returns to scale

The concept of comparative advantage predicts that if all countries had identical endowments and institutions, there would be little incentive for specialization because the opportunity cost of producing any good would be the same in every country.

So you may wonder: why is it then the case that in the last few years, we have seen such rapid growth in intra-industry trade between rich countries?

The increase in intra-industry between rich countries seems paradoxical under the light of comparative advantage because in recent decades we have seen convergence in key factors, such as human capital , across these countries.

The solution to the paradox is actually not very complicated: Comparative advantage is one, but not the only force driving incentives to specialization and trade.

Several economists, most notably Paul Krugman, have developed theories of trade in which trade is not due to differences between countries, but instead due to "increasing returns to scale" – an economic term used to denote a technology in which producing extra units of a good becomes cheaper if you operate at a larger scale.

The idea is that specialization allows countries to reap greater economies of scale (i.e. to reduce production costs by focusing on producing large quantities of specific products), so trade can be a good idea even if the countries do not differ in endowments, including culture and institutions.

These models of trade, often referred to as “New Trade Theory”, are helpful in explaining why in the last few years we have seen such rapid growth in two-way exchanges of goods within industries between developed nations.

In a much-cited paper, Evenett and Keller (2002) show that both factor endowments and increasing returns help explain production and trade patterns around the world. 37

You can learn more about New Trade Theory, and the empirical support behind it, in Paul Krugman's Nobel lecture .

Measurement and data quality

There are dozens of official sources of data on international trade, and if you compare these different sources, you will find that they do not agree with one another. Even if you focus on what seems to be the same indicator for the same year in the same country, discrepancies are large.

Such differences between sources can also be found in rich countries where statistical agencies tend to follow international reporting guidelines more closely.

There are also large bilateral discrepancies within sources: the value of goods that country A exports to country B can be more than the value of goods that country B imports from country A.

Here we explain how international trade data is collected and processed, and why there are such large discrepancies.

What data is available?

The data hubs from several large international organizations publish and maintain extensive cross-country datasets on international trade. Here's a list of the most important ones:

• World Bank Open Data
• WTO Statistics
• UN Comtrade
• UNCTAD World Integrated Trade Solutions

In addition to these sources, there are also many other academic projects that publish data on international trade. These projects tend to rely on data from one or more of the sources above, and they typically process and merge series in order to improve coverage and consistency. Three important sources are:

• The Correlates of War Project . 38
• The NBER-United Nations Trade Dataset Project .
• The CEPII Bilateral Trade and Gravity Data Project . 39

How large are the discrepancies between sources?

In the visualization here, we compare the data published by several of the sources listed above, country by country, from 1955 to today.

For each country, we exclude trade in services, and we focus only on estimates of the total value of exported goods, expressed as shares of GDP. 40

As this chart clearly shows, different data sources often tell very different stories. If you change the country or region shown you will see that this is true, to varying degrees, across all countries and years.

Constructing this chart was demanding. It required downloading trade data from many different sources, collecting the relevant series, and then standardizing them so that the units of measure and the geographical territories were consistent.

All series, except the two long-run series from CEPII and NBER-UN, were produced from data published by the sources in current US dollars and then converted to GDP shares using a unique source (World Bank).

So, if all series are in the same units (share of national GDP) and they measure the same thing (value of goods exported from one country to the rest of the world), what explains the differences?

Let's dig deeper to understand what's going on.

Why doesn't the data add up?

Differences in guidelines used by countries to record and report trade data.

Broadly speaking, there are two main approaches used to estimate international merchandise trade:

• The first approach relies on estimating trade from customs records , often complementing or correcting figures with data from enterprise surveys and administrative records associated with taxation. The main manual providing guidelines for this approach is the International Merchandise Trade Statistics Manual (IMTS).
• The second approach relies on estimating trade from macroeconomic data , typically National Accounts . The main manual providing guidelines for this approach is the Balance of Payments and International Investment Position Manual (BPM6), which was drafted in parallel with the 2008 System of National Accounts of the United Nations (SNA 2008). The idea behind this approach is to record changes in economic ownership. 41

Under these two approaches, it is common to distinguish between 'traded merchandise' and 'traded goods'. The distinction is often made because goods simply being transported through a country (i.e., goods in transit) are not considered to change a country's stock of material resources and are hence often excluded from the more narrow concept of 'merchandise trade'.

Also, adding to the complexity, countries often rely on measurement protocols developed alongside approaches and concepts that are not perfectly compatible to begin with. In Europe, for example, countries use the 'Compilers guide on European statistics on international trade in goods'.

Measurement error and other inconsistencies

Even when two sources rely on the same broad accounting approach, discrepancies arise because countries fail to adhere perfectly to the protocols.

In theory, for example, the exports of country A to country B should mirror the imports of country B from country A. But in practice this is rarely the case because of differences in valuation. According to the BPM6, imports, and exports should be recorded in the balance of payments accounts on a ' free on board (FOB) basis', which means using prices that include all charges up to placing the goods on board a ship at the port of departure. Yet many countries stick to FOB values only for exports, and use CIF values for imports (CIF stands for 'Cost, Insurance and Freight', and includes the costs of transportation). 42

The chart here gives you an idea of how large import-export asymmetries are. Shown are the differences between the value of goods that each country reports exporting to the US, and the value of goods that the US reports importing from the same countries. For example, for China, the figure in the chart corresponds to the “Value of merchandise imports in the US from China” minus the “Value of merchandise exports from China to the US”.

The differences in the chart here, which are both positive and negative, suggest that there is more going on than differences in FOB vs. CIF values. If all asymmetries were coming from FOB-CIF differences, then we should only see positive values in the chart (recall that, unlike FOB values, CIF values include the cost of transportation, so CIF values are larger).

What else may be going on here?

Another common source of measurement error relates to the inconsistent attribution of trade partners. An example is failure to follow the guidelines on how to treat goods passing through intermediary countries for processing or merchanting purposes. As global production chains become more complex, countries find it increasingly difficult to unambiguously establish the origin and final destination of merchandise, even when rules are established in the manuals. 43

And there are still more potential sources of discrepancies. For example differences in customs and tax regimes, and differences between "general" and "special" trade systems (i.e. differences between statistical territories and actual country borders, which do not often coincide because of things like 'custom free zones'). 44

Even when two sources have identical trade estimates, inconsistencies in published data can arise from differences in exchange rates. If a dataset reports cross-country trade data in US dollars, estimates will vary depending on the exchange rates used. Different exchange rates will lead to conflicting estimates, even if figures in local currency units are consistent.

A checklist for comparing sources

Asymmetries in international trade statistics are large and arise for a variety of reasons. These include conceptual inconsistencies across measurement standards and inconsistencies in the way countries apply agreed-upon protocols. Here's a checklist of issues to keep in mind when comparing sources.

• Differences in underlying records: is trade measured from National Accounts data rather than directly from custom or tax records?
• Differences in import and export valuations: are transactions valued at FOB or CIF prices?
• Inconsistent attribution of trade partners: how is the origin and final destination of merchandise established?
• Difference between 'goods' and 'merchandise': how are re-importing, re-exporting, and intermediary merchanting transactions recorded?
• Exchange rates: how are values converted from local currency units to the currency that allows international comparisons (most often the US-$)?
• Differences between 'general' and 'special' trade system: how is trade recorded for custom-free zones?
• Other issues: Time of recording, confidentiality policies, product classification, deliberate mis-invoicing for illicit purposes.

Many organizations producing trade data have long recognized these factors. Indeed, international organizations often incorporate corrections in an attempt to improve data quality.

The OECD's Balanced International Merchandise Trade Statistics , for example, uses its own approach to correct and reconcile international merchandise trade statistics. 45

The corrections applied in the OECD's 'balanced' series make this the best source for cross-country comparisons. However, this dataset has low coverage across countries, and it only goes back to 2011. This is an important obstacle since the complex adjustments introduced by the OECD imply we can't easily improve coverage by appending data from other sources. At Our World in Data we have chosen to rely on CEPII as the main source for exploring long-run changes in international trade, but we also rely on World Bank and OECD data for up-to-date cross-country comparisons.

There are two key lessons from all of this. The first lesson is that, for most users of trade data out there, there is no obvious way of choosing between sources. And the second lesson is that, because of statistical glitches, researchers and policymakers should always take analyses of trade data with a pinch of salt. For example, in a recent high-profile report , researchers attributed mismatches in bilateral trade data to illicit financial flows through trade mis-invoicing (or trade-based money laundering). As we show here, this interpretation of the data is not appropriate, since mismatches in the data can, and often do arise from measurement inconsistencies rather than malfeasance. 46

Hopefully, the discussion and checklist above can help researchers better interpret and choose between conflicting data sources.

Interactive charts on Trade and Globalization

The openness index, when calculated for the world as a whole, includes double-counting of transactions: When country A sells goods to country B, this shows up in the data both as an import (B imports from A) and as an export (A sells to B).

Indeed, if you compare the chart showing the global trade openness index and the chart showing global merchandise exports as a share of GDP , you find that the former is almost twice as large as the latter.

Why is the global openness index not exactly twice the value reported in the chart plotting global merchandise exports? There a three reasons.

First, the global openness index uses different sources. Second, the global openness index includes trade in goods and services, while merchandise exports include goods but not services. And third, the amount that country A reports exporting to country B does not usually match the amount that B reports importing from A.

We explore this in more detail in our measurement section below .

Klasing and Milionis (2014), one of the sources in the chart, published an additional set of estimates under an alternative specification. Similarly, for the period 1960-2015, the World Bank's World Development Indicators published an alternative set of estimates similar but not identical to those included from the Penn World Tables (9.1). You find all these alternative overlapping sources in this comparison chart .

Leonor Freire Costa, Nuno Palma, and Jaime Reis (2015) – The great escape? The contribution of the empire to Portugal's economic growth, 1500–1800 Leonor Freire Costa Nuno Palma Jaime Reis European Review of Economic History, Volume 19, Issue 1, 1 February 2015, Pages 1–22, https://doi.org/10.1093/ereh/heu019

Broadberry and O'Rourke (2010) - The Cambridge Economic History of Modern Europe: Volume 2, 1870 to the Present. Cambridge University Press.

Integration in the goods markets is measured here through the 'trade openness index', which is defined by the sum of exports and imports as a share of GDP. In our interactive chart you can explore trends in trade openness over this period for a selection of European countries.

Broadberry and O'Rourke (2010) - The Cambridge Economic History of Modern Europe: Volume 2, 1870 to the Present. Cambridge University Press. The graph depicts the “evolution of three indicators measuring integration in commodity, labor, and capital markets over the long run. Commodity market integration is measured by computing the ratio of exports to GDP. Labor market integration is measured by dividing the migratory turnover by population. Financial integration is measured using Feldstein–Horioka estimators of current account disconnectedness.”

We also have the same chart but showing imports .

We also have the same chart, but showing imports .

This interactive chart shows trade in services as a share of GDP across countries and regions.

This chart was inspired by a chart from Helpman, E., Melitz, M., & Rubinstein, Y. (2007). Estimating trade flows: Trading partners and trading volumes (No. w12927). National Bureau of Economic Research.

We also have the same data, but as a stacked-area chart .

There are different ways of capturing this correlation. I focus here on all countries with data over the period 1945-2014. You can find a similar chart using different data sources and time periods in Ventura, J. (2005). A global view of economic growth. Handbook of economic growth, 1, 1419-1497. Online here .

The textbook The Economy: Economics for a Changing World explains this in more detail.

Frankel, J. A., & Romer, D. H. (1999). Does trade cause growth? American Economic Review, 89(3), 379-399.

Alcalá, F., & Ciccone, A. (2004). Trade and productivity . The Quarterly Journal of Economics, 119(2), 613-646.

There are many papers that try to answer this specific question with macro data. For an overview of papers and methods see: Durlauf, S. N., Johnson, P. A., & Temple, J. R. (2005). Growth econometrics. Handbook of economic growth, 1, 555-677.

Pavcnik, N. (2002). Trade liberalization, exit, and productivity improvements: Evidence from Chilean plants . The Review of Economic Studies, 69(1), 245-276.

Bloom, N., Draca, M., & Van Reenen, J. (2016). Trade induced technical change? The impact of Chinese imports on innovation, IT and productivity. The Review of Economic Studies, 83(1), 87-117. Available online here .

You can read more about these economic concepts, and the related predictions from economic theory, in Chapter 18 of the textbook The Economy: Economics for a Changing World .

David, H., Dorn, D., & Hanson, G. H. (2013). The China syndrome: Local labor market effects of import competition in the United States . American Economic Review, 103(6), 2121-68.

It's important to mention here that the economist Jonathan Rothwell wrote a paper suggesting these findings are the result of a statistical illusion. Rothwell's critique received some attention from the media , but Autor and coauthors provided a reply , which I think successfully refutes this claim.

Magyari, I. (2017). Firm Reorganization, Chinese Imports, and US Manufacturing Employment . US Census Bureau, Center for Economic Studies.

Topalova, P. (2010). Factor immobility and regional impacts of trade liberalization: Evidence on poverty from India . American Economic Journal: Applied Economics, 2(4), 1-41.

Donaldson, D. (2018). Railroads of the Raj: Estimating the impact of transportation infrastructure . American Economic Review, 108(4-5), 899-934.

Porto, G (2006). Using Survey Data to Assess the Distributional Effects of Trade Policy. Journal of International Economics 70 (2006) 140–160.

Trefler, D. (2004). The long and short of the Canada-US free trade agreement . American Economic Review, 94(4), 870-895.

See: (i) Feenstra, R. C., & Weinstein, D. E. (2017). Globalization, markups, and US welfare . Journal of Political Economy, 125(4), 1040-1074. (ii) Fajgelbaum, P. D., & Khandelwal, A. K. (2016). Measuring the unequal gains from trade . The Quarterly Journal of Economics, 131(3), 1113-1180.

Atkin, David, Benjamin Faber, and Marco Gonzalez-Navarro. "Retail globalization and household welfare: Evidence from Mexico." Journal of Political Economy 126.1 (2018): 1-73.

In the paper, Atkin and coauthors explore the reasons for this and find that the regressive nature of the distribution is mainly due to richer households placing higher weight on the product variety and shopping amenities on offer at these new foreign stores.

Berlingieri, G., Breinlich, H., & Dhingra, S. (2018). The Impact of Trade Agreements on Consumer Welfare—Evidence from the EU Common External Trade Policy. Journal of the European Economic Association.

Nobel laureate Paul Samuelson (1969) was once challenged by the mathematician Stanislaw Ulam: "Name me one proposition in all of the social sciences which is both true and non-trivial." It was several years later than he thought of the correct response: comparative advantage. "That it is logically true need not be argued before a mathematician; that is is not trivial is attested by the thousands of important and intelligent men who have never been able to grasp the doctrine for themselves or to believe it after it was explained to them."

(NB. This is an excerpt from https://www.wto.org/english/res_e/reser_e/cadv_e.htm)

Bernhofen, D., & Brown, J. (2004). A Direct Test of the Theory of Comparative Advantage: The Case of Japan. Journal of Political Economy, 112(1), 48-67. doi:1. Retrieved from http://www.jstor.org/stable/10.1086/379944 doi:1

Eaton, J., & Kortum, S. (2002). Technology, geography, and trade. Econometrica, 70(5), 1741-1779.

Crozet, M., & Koenig, P. (2010). Structural Gravity Equations with Intensive and Extensive Margins. The Canadian Journal of Economics / Revue Canadienne D'Economique, 43(1), 41-62. Retrieved from http://www.jstor.org/stable/40389555

Manova, Kalina. "Credit constraints, heterogeneous firms, and international trade." The Review of Economic Studies 80.2 (2013): 711-744.

Melitz, J. (2008). Language and foreign trade. European Economic Review, 52(4), 667-699.

Evenett, S. J., & Keller, W. (2002). On theories explaining the success of the gravity equation . Journal of Political Economy, 110(2), 281-316.

For more information on how the COW trade datasets were constructed see: (i) Barbieri, Katherine, and Omar M. G. Omar Keshk. 2016. Correlates of War Project Trade Data Set Codebook, Version 4.0. Available at http://correlatesofwar.org and (ii) Barbieri, Katherine, Omar M. G. Keshk, and Brian Pollins. 2009. TRADING DATA: Evaluating our Assumptions and Coding Rules. Conflict Management and Peace Science, 26(5): 471–491.

Further information on CEPII's methodology can be found in their working paper .

The chart includes series labeled by the sources as 'merchandise trade' and 'goods trade'. As we explain below, part of the asymmetries in trade data comes from the fact that, although 'merchandise' and 'goods' are equivalent in the dictionary, these two terms often measure related but different things.

For example, if there is no change in ownership (e.g. a firm exports goods to its factory in another country for processing, and then re-imports the processed goods) the manual says that statistical agencies should only record the net difference in value. You can find more details about this in an OECD Statistics Briefing .

This issue is actually also a source of disagreement between National Accounts data and customs data. You can read more about it in this report: Harrison, Anne (2013) FOB/CIF Issue in Merchandise Trade/Transport of Goods in BPM6 and the 2008 SNA, Twenty-Fifth Meeting of the IMF Committee on Balance of Payments Statistics, Washington, D.C .

Precisely because of the difficulty that arises when trying to establish the origin and final destination of merchandise, some sources distinguish between national and dyadic (i.e. 'directed') trade estimates.

For more details about general and special trade see the Eurostat glossary .

The OECD approach consists of four steps, which they describe as follows: "First, data are collected and organized, and imports are converted to FOB prices to match the valuation of exports. Secondly, data are adjusted for several specific large problems known to drive asymmetries. Presently these include “modular” adjustments for unallocated and confidential trade; for exports by Hong Kong, China; for Swiss non-monetary gold; and for clear-cut cases of product misclassifications. The list of modules is expected to grow over time. In the third step, adjusted data are balanced using a “Symmetry Index” that weights exports and imports. As the final step, the data are also converted to Classification of Products by Activity (CPA) products to better align with National Accounts statistics, such as in national Supply-Use tables." You can read more about it here . In addition to the OECD, other sources also use corrections. The IMF's DOTS dataset, for example, uses a 6 percent rule for converting import valuations (in CIF) into export values (in FOB). More information can be found in the IMF's (2018) working paper on 'New Estimates for Direction of Trade Statistics'.

For more details on this see Forstater, M. (2018) Illicit Financial Flows, Trade Misinvoicing, and Multinational Tax Avoidance: The Same or Different? , CGD Policy Paper 123.

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Key statistics and trends in international trade 2023

Global trade has followed a highly volatile pattern since the onset of the COVID-19 pandemic. Fragmentation and increased heterogeneity of trade performance characterize not only the rebound of 2021 and 2022 but also the recent trade slowdown, albeit to a lesser extent.

While it is premature to definitively assert whether the recent trend is a substantial departure from established global trade trends, it appears possible that COVID-19 disruptions initiated a significant shift in global trade, now fuelled by systemic patterns tied to geopolitical issues and risk-mitigating strategies.

The convergence of these factors raises the possibility that global trade patterns will be undergoing more significant changes, ushering in a new era with distinct challenges and opportunities for economies worldwide.

Monitoring these developments closely is crucial in understanding the implications of evolving trade dynamics for developing countries.

This report is structured into two parts.

The first part presents a short-term overview of the status of international trade using preliminary statistics on merchandise trade until the first half of 2023.

The second part provides illustrative statistics on international trade in goods and services covering the medium term. The second part is divided into two sections.

• Section 1 provides trade statistics at various levels of aggregation that illustrate the evolution of trade across economic sectors and geographic regions.  
• Section 2 presents trade indicators to inform on some specifics of the trade patterns at the country level.

• Data, Statistics and Trends in International Trade
• Key Statistics and Trends: International Trade

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Finance & Development Magazine

International Trade: Commerce among Nations

Brad McDonald

Back to Basics

Credit: ISTOCK / RASTUDIO

BACK TO BASICS COMPILATION

Nations are almost always better off when they buy and sell from one another

If there is a point on which most economists agree, it is that trade among nations makes the world better off. Yet international trade can be one of the most contentious of political issues, both domestically and between governments.

When a firm or an individual buys a good or a service produced more cheaply abroad, living standards in both countries increase. There are other reasons consumers and firms buy abroad that also make them better off—the product may better fit their needs than similar domestic offerings or it may not be available domestically. In any case, the foreign producer also benefits by making more sales than it could selling solely in its own market and by earning foreign exchange (currency) that can be used by itself or others in the country to purchase foreign-made products.

Still, even if societies as a whole gain when countries trade, not every individual or company is better off. When a firm buys a foreign product because it is cheaper, it benefits—but the (more costly) domestic producer loses a sale. Usually, however, the buyer gains more than the domestic seller loses. Except in cases in which the costs of production do not include such  social costs  as pollution, the world is better off when countries import products that are produced more efficiently in other countries.

Those who perceive themselves to be affected adversely by foreign competition have long opposed international trade. Soon after economists such as Adam Smith and David Ricardo established the economic basis for free trade, British historian Thomas B. Macaulay was observing the practical problems governments face in deciding whether to embrace the concept: “Free trade, one of the greatest blessings which a government can confer on a people, is in almost every country unpopular.”

Two centuries later trade debates still resonate.

Why countries trade

In one of the most important concepts in economics, Ricardo observed that trade was driven by  comparative  rather than  absolute  costs (of producing a good). One country may be more productive than others in all goods, in the sense that it can produce any good using fewer inputs (such as capital and labor) than other countries require to produce the same good. Ricardo’s insight was that such a country would still benefit from trading according to its  comparative advantage —exporting products in which its absolute advantage was greatest, and importing products in which its absolute advantage was comparatively less (even if still positive).

Comparative advantage

Even a country that is more efficient (has absolute advantage) in everything it makes would benefit from trade. Consider an example:

Country A: One hour of labor can produce either three kilograms of steel or two shirts. Country B: One hour of labor can produce either one kilogram of steel or one shirt.

Country A is more efficient in both products. Now suppose Country B offers to sell Country A two shirts in exchange for 2.5 kilograms of steel.

To produce these additional two shirts, Country B diverts two hours of work from producing (two kilograms) steel. Country A diverts one hour of work from producing (two) shirts. It uses that hour of work to instead produce three additional kilograms of steel.

Overall, the same number of shirts is produced: Country A produces two fewer shirts, but Country B produces two additional shirts. However, more steel is now produced than before: Country A produces three additional kilograms of steel, while Country B reduces its steel output by two kilograms. The extra kilogram of steel is a measure of the gains from trade.

Though a country may be twice as productive as its trading partners in making clothing, if it is three times as productive in making steel or building airplanes, it will benefit from making and exporting these products and importing clothes. Its partner will gain by exporting clothes—in which it has a comparative but not absolute advantage—in exchange for these other products (see box). The notion of comparative advantage also extends beyond physical goods to trade in services—such as writing computer code or providing financial products.

Because of comparative advantage, trade raises the living standards of both countries. Douglas Irwin (2009) calls comparative advantage “good news” for economic development. “Even if a developing country lacks an absolute advantage in any field, it will always have a comparative advantage in the production of some goods,” and will trade profitably with advanced economies.

Differences in comparative advantage may arise for several reasons. In the early 20th century, Swedish economists Eli Heckscher and Bertil Ohlin identified the role of labor and capital, so-called factor endowments, as a determinant of advantage. The Heckscher-Ohlin proposition maintains that countries tend to export goods whose production uses intensively the factor of production that is relatively abundant in the country. Countries well endowed with capital—such as factories and machinery—should export capital-intensive products, while those well endowed with labor should export labor-intensive products. Economists today think that factor endowments matter, but that there are also other important influences on trade patterns (Baldwin, 2008).

Recent research finds that episodes of trade opening are followed by adjustment not only  across  industries, but  within  them as well. The increase in competition coming from foreign firms puts pressure on profits, forcing less efficient firms to contract and making room for more efficient firms. Expansion and new entry bring with them better technologies and new product varieties. Likely the most important is that trade enables greater selection across different types of goods (say refrigerators). This explains why there is a lot of intra-industry trade (for example, countries that export household refrigerators may import industrial coolers), which is something that the factor endowment approach does not encompass.

There are clear efficiency benefits from trade that results in  more  products—not only more of the same products, but greater product variety. For example, the United States imports four times as many varieties (such as different types of cars) as it did in the 1970s, while the number of countries supplying each good has doubled. An even greater benefit may be the more efficient investment spending that results from firms having access to a wider variety and quality of intermediate and capital inputs (think industrial optical lenses rather than cars). By enhancing overall investment and facilitating innovation, trade can bring sustained higher growth.

Indeed, economic models used to assess the impact of trade typically neglect influences involving technology transfer and pro-competitive forces such as the expansion of product varieties. That is because these influences are difficult to model, and results that do incorporate them are subject to greater uncertainty. Where this has been done, however, researchers have concluded that the benefits of trade reforms—such as reducing tariffs and other nontariff barriers to trade—are much larger than suggested by conventional models.

Why trade reform is difficult

Trade contributes to global efficiency. When a country opens up to trade, capital and labor shift toward industries in which they are used more efficiently. That movement provides society a higher level of economic welfare. However, these effects are only part of the story.

Trade also brings dislocation to those firms and industries that cannot cut it. Firms that face difficult adjustment because of more efficient foreign producers often lobby against trade. So do their workers. They often seek barriers such as import taxes (called tariffs) and quotas to raise the price or limit the availability of imports. Processors may try to restrict the exportation of raw materials to depress artificially the price of their own inputs. By contrast, the benefits of trade are spread diffusely and its beneficiaries often do not recognize how trade benefits them. As a result, opponents are often quite effective in discussions about trade.

Trade policies

Reforms since World War II have substantially reduced government-imposed trade barriers. But policies to protect domestic industries vary. Tariffs are much higher in certain sectors (such as agriculture and clothing) and among certain country groups (such as less developed countries) than in others. Many countries have substantial barriers to trade in services in areas such as transportation, communications, and, often, the financial sector, while others have policies that welcome foreign competition.

Moreover, trade barriers affect some countries more than others. Often hardest hit are less developed countries, whose exports are concentrated in low-skill, labor-intensive products that industrialized countries often protect. The United States, for example, is reported to collect about 15 cents in tariff revenue for each $1 of imports from Bangladesh (Elliott, 2009), compared with one cent for each $1 of imports from some major western European countries. Yet imports of a particular product from Bangladesh face the same or lower tariffs than do similarly classified products imported from western Europe. Although the tariffs on Bangladesh items in the United States may be a dramatic example, World Bank economists calculated that exporters from low-income countries face barriers on average half again greater than those faced by the exports of major industrialized countries (Kee, Nicita, and Olarreaga, 2006).

The World Trade Organization (WTO) referees international trade. Agreements devised since 1948 by its 153 members (of the WTO and its predecessor General Agreement on Trade and Tariffs) promote nondiscrimination and facilitate further liberalization in nearly all areas of commerce, including tariffs, subsidies, customs valuation and procedures, trade and investment in service sectors, and intellectual property. Commitments under these agreements are enforced through a powerful and carefully crafted dispute settlement process.

Under the rules-based international trading system centered in the WTO, trade policies have become more stable, more transparent, and more open. And the WTO is a key reason why the global financial crisis did not spark widespread protectionism. However, as seen most recently with the Doha Round of WTO trade negotiations, the institution faces big challenges in reaching agreements to open global trade further. Despite successes, restrictive and discriminatory trade policies remain common. Addressing them could yield hundreds of billions of dollars in annual global benefits. But narrow interests have sought to delay and dilute further multilateral reforms. A focus on the greater good, together with ways to help the relatively few that may be adversely affected, can help to deliver a fairer and economically more sensible trading system.

Brad McDonald is a Deputy Division Chief in the IMF’s External Sector Unit.

Opinions expressed in articles and other materials are those of the authors; they do not necessarily reflect IMF policy.

References:

Baldwin Robert E., 2008, The Development and Testing of Heckscher-Ohlin Trade Models: A Review, (Cambridge, Massachusetts: MIT Press). Elliott, Kimberley Ann, 2009, “Opening Markets for Poor Countries: Are We There Yet?” Center for Global Development Working Paper 184 (Washington). Irwin, Douglas A., 2009, Free Trade under Fire (Princeton, New Jersey: Princeton University Press, 3rd ed.). Kee, Hiau Looi, Alessandro Nicita, and Marcelo Olarreaga, 2006, “Estimating Trade Restrictiveness Indices,” World Bank Policy Research Working Paper No. 3840 (Washington). 

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International Trade, Empirical Approaches to

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• Stephen J. Redding 1  

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This article reviews empirical research in international trade, which has undergone a resurgence since the mid-1980s. The article begins with traditional trade empirics, in which cross-country differences in opportunity costs of production (comparative advantage) are the basis for trade, before turning to new trade empirics, in which consumer love of variety and increasing returns to scale give rise to trade in similar goods between similar countries. More recent empirical research has emphasized heterogeneity across products within industries and across individual plants and firms, while other recent work has focused on the political economy of trade policy.

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Redding, S.J. (2018). International Trade, Empirical Approaches to. In: The New Palgrave Dictionary of Economics. Palgrave Macmillan, London. https://doi.org/10.1057/978-1-349-95189-5_2647

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International trade and integration: The latest research

Alejandro forero, ana fernandes.

What’s the latest research in international trade and integration? Researchers from the World Bank, the IMF and the WTO recently gathered for a one-day workshop to present their latest research on the topic. The papers presented addressed topical questions in areas as diverse as the links between trade, wage inequality and the poor, global value chains, non-tariff measures, preferential trade agreements, FDI restrictions, and migration. We provide a quick roundup on the papers presented during the workshop.

On trade, wage inequality, labor mobility and the poor Countries often protect their poor by raising tariffs on the goods they produce. But if all countries apply pro-poor trade policies, a coordination problem arises since the poor are employed in similar sectors across countries.  The result is that the goods the poor produce face higher barriers in destination markets. Roberta Piermartini from the WTO shows that indeed tariffs faced by Indian exports abroad are higher for goods produced by individuals in lower-income groups and by women. Removing this unbalanced access to international markets may contribute to a more even distribution of the gains from trade.   Empirical evidence shows that after countries liberalize trade, wage inequality increases gradually for several years but then stops increasing and can even decrease. The model by Matthieu Bellon from the IMF explains this evidence emphasizing the dynamics of worker reallocation between heterogeneous firms and workers in the presence of adjustment costs to labor.     Using a novel district-to-district migration dataset, Aaditya Mattoo from the World Bank studies the determinants of worker mobility across Indian districts. He provides evidence of invisible walls across state borders  explained by the existence of state-level entitlement schemes, ranging from access to subsidized goods through the public distribution system to the bias in favor of states’ own residents in access to tertiary education and public sector employment.   On Global Value Chains (GVCs)   Strong domestic linkages across firms reduce fragmentation costs but also create a lock-in situation in relationship-specific sectors. Therefore, domestic value chains (DVCs) can either be stepping stones or stumbling blocks for GVCs. Cosimo Beverelli from the WTO presents empirical evidence showing that GVCs have their foundations in DVCs, supporting the stepping stone hypothesis.   Real currency depreciations not only increase exports of domestic value-added (DVA) - a conventional result - but also increase imports of foreign value added (FVA) - a result contrasting with traditional trade theory, according to the study by Gee Hee Hong from the IMF.  These results support the idea that GVC-related exports and imports are complements in production.   On preferential trade agreements   The impact of trade agreements in existence until 1995 is revisited by Swarnali Hannan from the IMF who introduces synthetic control methods as a novel approach to establish causality. She finds substantial gains from trade agreements, with an average boost to exports among preferential partners of 80 percentage points over a decade.   Exploring the role of deep trade agreements, which go beyond tariff reduction to cover policy areas such as investment, competition policy, and intellectual property rights protection, Alen Mulabdic from the World Bank uses a new dataset on the depth and content of the agreements to show that deep trade agreements lead to more trade creation and less trade diversion than shallow trade agreements.   Below is a brief flavor of other interesting papers also presented at the workshop:

• Revisiting the trade and growth debate focusing on China as a source of supply and demand shocks, Jaebin Ahn from the IMF finds a positive impact of Chinese import penetration and export market access on sectoral total factor productivity growth in advanced economies. The recent trade slowdown could thus weigh significantly on the already weak productivity growth in advanced economies.
• Using a new methodology to estimate bilateral ad valorem equivalent (AVE) of non-tariff measures (NTMs), Hiau Looi Kee from the World Bank shows that products with higher AVEs exhibit larger discrepancies across reported import and export statistics for a given bilateral flow.  The evidence is consistent with the hypothesis that firms misdeclare product codes or country of origin to circumvent cumbersome and opaque NTMs.
• According to a unique disaggregated IMF dataset on global trade in services, presented by Saurabh Mishra from the IMF, service exports from developing countries have grown tenfold since 1990 - twice as fast as those from advanced economies.  Transport and travel have lost share in world services exports to intellectual property and financial services.
• The availability of factoring - an alternative finance instrument - is shown by Marc Auboin from the WTO to allow small firms in emerging economies to access international markets, in particular by being involved in global supply chains.
• Foreign acquisitions improve management practices – e.g., through an increase in the number of hierarchical layers and increased span of control among top managers. One reasons could be acquisition-induced reductions in communication costs within acquired firms in Portugal, according to the study by Paulo Bastos from the World Bank.
• Bilateral investment agreements can lower FDI restrictions but in practice several countries have lowered their FDI restrictions without such agreements while others retain high FDI restrictions with no interest in such agreements. The research by Mathilde Lebrand from the World Bank emphasizes the role of tax havens to which the profits of multinationals can be shifted as an important determinant of FDI restrictions.
• Aggregate trade responds sharply to spatial frictions, falling rapidly over short distances as distance to the destination increases, even within the European Single Market. The study by Shawn Tan from the World Bank shows that such sharp trade responses are explained by trade in intermediate inputs, as there is spatial clustering of firms connected by input-output linkages, who choose to co-locate to avoid trade costs.
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• Published: 13 July 2020

Impacts of international trade on global sustainable development

• Zhenci Xu 1 , 2   na1 ,
• Yingjie Li 1 , 3   na1 ,
• Sophia N. Chau   ORCID: orcid.org/0000-0002-6504-2020 1 ,
• Thomas Dietz 1 , 3 , 4 ,
• Canbing Li 5 ,
• Luwen Wan   ORCID: orcid.org/0000-0002-6414-4500 6 ,
• Jindong Zhang 7 ,
• Liwei Zhang   ORCID: orcid.org/0000-0002-2195-1070 8 ,
• Yunkai Li 9 ,
• Min Gon Chung   ORCID: orcid.org/0000-0002-7177-7189 1 , 3 &
• Jianguo Liu   ORCID: orcid.org/0000-0001-6344-0087 1  

Nature Sustainability volume  3 ,  pages 964–971 ( 2020 ) Cite this article

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The United Nations has adopted 17 Sustainable Development Goals (SDGs) with 169 targets. International trade has substantial influences on global sustainability and human well-being. However, little is known about the impacts of international trade on progress towards achieving the SDG targets. Here we show that international trade positively affected global progress towards achieving nine environment-related SDG targets. International trade improved the SDG target scores of most (65%) of the evaluated developed countries but reduced the SDG target scores of over 60% of the evaluated developing countries. The SDG target scores of developed countries were higher than those of developing countries when trade was accounted for, but those scores would be lower than those of developing countries if trade were not a factor. Furthermore, trade between distant countries contributed more to achieving these global SDG targets than trade between adjacent countries. Compared with adjacent trade, distant trade was more beneficial for achieving SDG targets in developed countries, but it more negatively affected SDG target scores in developing countries. Our research suggests that enhancing the accounting for and management of virtual resources embedded in trade is essential for achieving and balancing sustainable development for all.

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Acknowledgements

We thank R. M. Scarrow and S. Nichols for their constructive comments that have greatly helped improve the paper. We are grateful for financial support from the National Science Foundation (grant nos DEB-1924111 and DEB-1340812), Michigan State University, Michigan AgBioResearch, the Environmental Science and Policy Program (ESPP) Doctoral Recruiting Fellowships and the China Scholarship Council.

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These authors contributed equally: Zhenci Xu, Yingjie Li.

Authors and Affiliations

Center for Systems Integration and Sustainability, Department of Fisheries and Wildlife, Michigan State University, East Lansing, MI, USA

Zhenci Xu, Yingjie Li, Sophia N. Chau, Thomas Dietz, Min Gon Chung & Jianguo Liu

School for Environment and Sustainability, University of Michigan, Ann Arbor, MI, USA

Environmental Science and Policy Program, Michigan State University, East Lansing, MI, USA

Yingjie Li, Thomas Dietz & Min Gon Chung

Department of Sociology, Michigan State University, East Lansing, MI, USA

Thomas Dietz

Department of Electrical Engineering, Shanghai Jiao Tong University, Shanghai, China

Department of Earth and Environmental Sciences, Michigan State University, East Lansing, MI, USA

Key Laboratory of Southwest China Wildlife Resources Conservation, China West Normal University, Nanchong, China

Jindong Zhang

School of Geography and Tourism, Shaanxi Normal University, Xi’an, China

Liwei Zhang

College of Water Resources and Civil Engineering, China Agricultural University, Beijing, China

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Z.X., Yingjie Li and J.L. designed the research. Z.X. and Yingjie Li contributed the data. Yingjie Li and Z.X. performed the data analysis and interpreted the results with support from S.N.C., J.L., T.D., C.L., L.W., J.Z., L.Z., Yunkai Li and M.G.C. Yingjie Li, Z.X. and J.L. wrote the manuscript with contributions from S.N.C. and T.D. All authors reviewed and commented on the manuscript.

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Xu, Z., Li, Y., Chau, S.N. et al. Impacts of international trade on global sustainable development. Nat Sustain 3 , 964–971 (2020). https://doi.org/10.1038/s41893-020-0572-z

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International Trade Policy under Biden: The “New” Washington Consensus and Its Discontents

The biden administration is abandoning the rules-based international trading system in favor of a self-proclaimed new washington consensus that redefines trade policy. can it work.

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After four years of President Trump’s slash-and-burn trade policy, the bar for the incoming Biden administration could hardly have been lower. Trump’s “America First” bravado was an ungainly amalgam of tax hikes (against foes and friends alike), bilateral power plays (for example, Trump ordered the “renegotiation” of the Korea-US Free Trade Agreement [KORUS], otherwise threatening termination of what he termed “ a horrible deal ”), and a retreat from international trade cooperation (among others, spurning the megaregional Trans-Pacific Partnership [TPP] and undermining the World Trade Organization [WTO]). Trump’s trade policies not only ruffled the feathers of many of America’s closest trade partners, but they were also economically ineffective. Notably, they failed to benefit even those sectors and locations that his tariffs were supposed to protect. Ironically, the Trump tariffs did not change China’s behavior one bit.

A “New” Washington Consensus

It came as no small surprise when President Biden, despite calling Trump’s trade actions “disastrous” and “reckless,” not only failed to repudiate those policies, but actually amplified them. This is not to say that Trump’s and Biden’s versions of economic nationalism are equivalent. Trump’s style was all sticks and no carrots—belligerent, scattershot, and ad hoc. Biden’s version, albeit no less fervent, is soft-footed and polite—more carrots than sticks; commentators have called it “ polite protectionism ” or “ pragmatic unilateralism . ” Most notably, Biden provides a coherent intellectual superstructure that ties his administration’s trade policy to its overall international economic strategy. 

In a scarcely noticed but consequential speech in July 2023, National Security Advisor Jake Sullivan outlined the Biden administration’s economic ideology. Sullivan blamed the United States’ most pressing challenges—namely, a hollowed-out industrial manufacturing base, dramatic economic inequality between rich and poor and between coast and heartland, the economic and military rise of China, and the climate crisis—on a number of factors including hyperglobalization, unfettered deregulation, naive beliefs in trickle-down economics and market efficiency, and trade liberalization as an end in itself. Drawing a sharp contrast to the 1990s-era policy package known as the “Washington Consensus”—championed by the US Treasury, IMF, and World Bank—that according to Sullivan encapsulates the idolatry of free markets and liberalized trade, he declared that the Biden administration stood for a “New Washington Consensus.” To address the above-mentioned challenges, the administration’s novel paradigm is aimed at achieving supply-chain resilience in strategically important sectors, a return to former manufacturing grandeur, more equitable growth that benefits American workers, rapid decarbonization and a successful transition to green technologies, and a containment of China’s military and economic might. 

Few Americans would disagree that these are worthy goals. It is, however, the implementation of these goals that warrants scrutiny: Sullivan stated that this “New” Washington Consensus was to be effectuated by a policy bundle including (1) a “modern American industrial strategy,” (2) selective partnerships with economic allies, and (3) various policies aimed at curbing the ascent of China. In the following, I argue that each of these three strategies is fraught with peril. In addition, I show that this alleged new “consensus” does not reflect unanimity between the United States on the one hand and its trade allies on the other, but rather constitutes a unilateral move to undo over six decades of trade liberalization. In the final section, I propose an alternative to the so-called “New” Washington Consensus—an alternative set of policies that achieves better results for the United States and remains in the four corners of a rules-based global trading order.

Biden’s Industrial Policy: Subsidies on Steroids

Let us start with the first pillar of the “New” Washington Consensus, Biden’s industrial policy. It is a mix of muscular government interventions that consist of the following:

• direct subsidies and tax credits, enacted through the Inflation Reduction Act (IRA), the Creating Helpful Incentives to Produce Semiconductors Act (CHIPS Act), and the Research and Development, Competition, and Innovation Act—all targeted at industries deemed especially critical or strategic, mainly semiconductors and green technologies;
• “Buy America” provisions for government procurement;
• favorable loan terms; and
• protectionist trade policies, including continuation of many Trump-era tariffs, domestic content requirements, and so-called trade defense measures (intended to punish alleged foreign dumping and—irony of ironies—to counter foreign subsidies that affect exports to the United States).

True to its promise, in mid-May of this year the administration slapped new tariffs up to 100 percent on Chinese electric vehicles, advanced batteries, solar cells, semiconductors, steel, aluminum, and medical equipment, thus affecting imports of green and clean tech goods in excess of $18 billion. (These new tariffs, notably, are imposed on top of the still active across-the-board import tariffs on some $350 billion in Chinese goods originally imposed by the Trump administration, which cost US consumers and downstream industries $48 billion annually, and that entail welfare losses of at least $1.4 billion per month caused by reconfigurations of US supply chains and an overall reduction in the availability of imported varieties.)

While industrial policy done right can be useful, all indications are that Biden’s version is poised to cause significant domestic and international damage. This is not the place to offer a fulsome critique of the risks that Biden’s industrial-policy package poses for the domestic economy. Suffice it to say that the package is costly (experts expect IRA subsidies to be $1.2 trillion over the next decade—three times more than initially forecast), which in and of itself is not fatal if the returns are adequate. However, the returns may not be adequate.

First, there is the challenge of getting industrial policy right. It is difficult for any administration, let alone that of the world’s biggest economy, to pinpoint the precise industry targets and provide the appropriate amount of incentives. The range and depth of knowledge that the Biden administration must possess in order to implement successful industrial policy is extraordinary. It not only must know and understand the relevance of broad-ranging and complex questions, but it must also undertake weighing alternatives and prescribing an adequately supported policy mix. These are skills rarely found in the private sector, let alone in the civil servantry. Even highly trained (and remunerated) portfolio managers who specialize in single industry stocks, as well as industrial conglomerates themselves, oftentimes founder at even a fraction of the tasks required to design successful industrial policy.

Second, there is the difficulty of achieving the objectives of the industrial package. It is not at all clear how Biden’s policies will undo 30 years of lost manufacturing edge , out-subsidize Chinese production of semiconductors and green technologies, and re-shore entire value chains for these sophisticated technologies . In fact, it appears that even evaluating applications and distributing approved funds already strain the system. For example, well over a year after passage of the CHIPS Act, many recipients are still awaiting funds. (Worse still, a significant chunk of the promised funds are unavailable: the Federation of American Scientists reports an appropriations gap of $8 billion for the R&D portion of the CHIPS Act, thus leaving core national and regional science, research, and education projects underfunded.)

Third, even if Biden were to overcome these nontrivial roadblocks, it is the unintended consequences of industrial policy that are the most troubling aspect of the administration’s industrial policy package: For one, industrial policy creates numerous distortions in those industries that receive subsidies and trade protections. These distortions include anything from monopolization (or oligopolization) in protected markets to favoritism and political horse-trading, inadequate supervision of policy implementation, entitlements (once granted, subsidies tend to stick around long after the policy objectives have been achieved), and cascading protectionism. These unintended consequences more often than not result in growing complacency, reduced productivity, and less innovation in subsidized sectors. 

More critically, strategic support of some industries and not others crowds out resources otherwise allocated to export-oriented firms and industries in which the United States has an international comparative advantage (i.e., lower costs or superior quality). Apart from not getting handouts, unsubsidized industries also face higher relative costs—for employees, capital, and raw and intermediate materials. Notably, the unsubsidized export-oriented firms are the ones that are most agile, productive, and innovative, and thus most able to bring about decarbonization, supply chain resilience, national security, and better wages. 

In the end, Biden’s industrial policy tied to specific industries and localities is unlikely to create jobs (instead, it merely shifts them from export industries to protected industries), let alone unionized jobs in the heartland (a region that already suffers from a crippling dearth of skilled labor). It is furthermore unlikely to boost overall US economic growth beyond the initial spending bump. It is, however, likely that the real results of Biden’s industrial policy are higher consumer prices, accelerating inflation, and an overall loss of US competitiveness. 

Domestic effects aside, Biden’s industrial policy also has negative international repercussions. First, many of the industrial policies violate the very trade principles the United States championed when it helped form the WTO. In a way, the United States therewith forgoes its privileged position in promoting and developing trade rules abroad (and legitimately enforcing those rules). It certainly forgoes any legitimacy in disciplining behavior abroad that the United States itself has implemented at home. 

Second, Biden’s industrial policy is essentially self-dealing. It is designed to draw investment, production, and raw materials away from other countries. This zero-sum logic will almost definitely provoke an international backlash . Let us start with those countries that can afford to pay subsidies to domestic industries. Powerful countries will retaliate, emulate, or, in rare instances, negotiate. None of these responses are good news for the US economy, as is obvious in situations where countries retaliate against US exports of goods and services (recall, for example, China’s reaction to the Trump tariffs). When other countries emulate our discriminatory industrial policies, the harm to the US economy may be particularly pronounced, because it again shuts out US exports and may easily trigger lose–lose subsidy wars in which too-big-to-fail national champions compete on the world stage. In addition to being costly to the supporting countries, subsidy wars also tend to stifle innovation and technological diffusion, which would be particularly bad for accelerating a green energy transition. Losses to the US economy are smallest in cases in which powerful trade partners manage to negotiate preferential access to the US market (for example, the European Union [EU] managed to extract concessions for its electric vehicles to benefit from certain IRA subsidies). Yet, imports still risk being more expensive, and potentially of lower quality compared to imports entering under a nondiscriminatory policy alternative.

Next, consider the reaction of poorer countries that cannot afford costly subsidy programs.   These countries will see shrinking export markets and inward investment, and thus less developmental progress. They will find themselves hat in hand, begging for access to the US market, to become part of US supply chains, or at least to be able to export raw or processed materials. This is guaranteed to breed mistrust and resentment against the United States and may draw these poorer countries toward other trade alliances. 

Biden’s Strategy for International Cooperation: Milquetoast 

Let us now turn to the second policy prescription of the “New” Washington Consensus: Biden’s strategy for cooperating with trade partners and allies. The good news is that the Biden administration, as opposed to its predecessor, actually sees virtue in international cooperation. That said, it is instructive to note what Biden’s trade cooperation strategy does not include: it entails no aspirations to pursue either traditional trade agreements (such as rejoining the TPP or finalizing the Transatlantic Trade and Investment Partnership [T-TIP] with the European Union). It entails no ambition for a revitalization of the multilateral trading order. On the contrary, Biden has continued Trump’s expansive assertion of national security exceptions to justify trade restrictions and has dialed back US ambitions for ongoing trade negotiations in key areas such as digital trade. 

The United States under Biden has championed sectoral partnerships (such as the critical minerals agreement negotiations initiated with allies Japan and the EU) and so-called framework agreements (such as the Indo-Pacific Economic Framework for Prosperity [IPEF]). What is common to these types of agreements is that the United States is not willing to make concessions, particularly market access concessions , to foreign goods and services. Rather, the sectoral partnerships championed by the United States are solely based on areas of common interest. Some sectoral partnerships deal with financing infrastructure projects in the region, others with developing secure supplies of minerals needed to make advanced electronics or writing agreements to facilitate digital commerce. Some are mutual accords to exclude, or induce behavior changes of, third parties (as with the planned Global Arrangement on Sustainable Steel and Aluminum [ GASSA ] with the EU that limits access to US and EU markets for “dirty” Chinese and Indian steel). While these sectoral agreements can be quite effective, they may not always be WTO compliant . 

As for the negotiations of framework agreements, the US strategy largely involves the attempt to extract commitments on environmental or labor standards from trade partners. In addition, the Biden administration aims at negotiating mutual recognition of existing procedures or standards. 

All of this is weak tea, because the United States is not willing to give something to get something. There is no incentive for other countries to adopt proposed principles (besides those that are in their interest anyway). The last IPEF summit in November of 2023 predictably collapsed because the United States asked developing countries to give up comparative advantages (cheaper labor and laxer environmental rules) for nothing in return. Under the current mindset, one may reasonably expect that future “trade” agreements will be less about trade and more about forging political and security relations and thus may easily become subject to political whims and maneuvers. Trade agreements motivated by politics, rather than economics, may jeopardize, rather than strengthen, supply-chain efficiency and resilience. Moreover, they risk being fair-weather accords—purely transactional bargains that can be violated or revoked at no cost at any time. While those weak accords help further Biden’s domestic agenda that shields US industries from global competition, it is anyone’s guess how such trade deals will ultimately benefit US workers, make supply chains more resilient, or result in decarbonization. 

Moreover, the US disinterest in reciprocal trade liberalization drives countries that still believe in liberalized trade and the efficiencies it entails into the arms of US rivals. Case in point, while the United States is sitting on the sidelines, the EU is in the process of finalizing a trade deal with Mercosur, while the United Kingdom is engaged in negotiations with eight countries in parallel. China is also aggressively pursuing new trade agreements, such as the Regional Comprehensive Economic Partnership (RCEP) and the Comprehensive and Progressive Agreement for Trans-Pacific Partnership (CPTPP), TPP’s new name after the United States’ exit.

Biden’s China Strategy: Go It Alone

Finally, arguing that China pursues aggressive economic policies and has flouted international trade rules, either in letter or in spirit, the Biden team has set an objective of slowing down China’s economic and military ascent. Yet the United States cannot single-handedly take on China, even if the US objective is not decoupling but derisking, as Sullivan claims (although some commentators have questioned Washington’s derisking stance in light of the administration’s latest tariff escalation affecting Chinese clean tech). If the United States acts alone, China itself may decide to decouple, racing to find different markets for its exports, to develop different sources for critical imports, and to push technological advances at home to reduce dependency on the United States. Needless to say, a decoupling that goes too far too soon would be to the detriment of US companies, could jeopardize Biden’s green revolution, and could potentially even affect US military and intelligence capabilities. Focusing on export controls against China (only one policy in the US trade toolkit), a recent paper by the New York Federal Reserve estimates that US firms affected by export controls face declines of revenues by 8.6 percent, profitability by 25 percent, and employment by 7.1 percent (while, unsurprisingly, China substitutes US imports for non-US suppliers and domestic firms).

To be effective in pursuing its objectives vis-à-vis China, the United States needs to deepen relations with key allies and present a united front against violations of the international trading system. It is then all the more puzzling that the Biden administration continues to weaken, rather than strengthen, important alliances it relies on to effectively pursue its China objectives with minimal economic blowback. Examples abound: the “ pause ” on US liquefied natural gas exports that sent shockwaves through the EU; the quiet shelving of a US–UK trade agreement; or President Biden’s opposition to the nonhostile acquisition of US Steel by Japanese market leader Nippon Steel, stating that “it is vital for [US Steel] to remain an American steel company that is domestically owned and operated.” 

“New” Washington Consensus, or “Washington Consensus 2.0”?

It is not clear whether President Biden’s trade stance is owed to political exigencies or personal conviction. It may also be that Biden is simply unable to stave off a seismic shift toward economic populism and nationalism in US economic policy that is bigger than either Trump or Biden. Be that as it may, it is not an exaggeration to note that the Biden administration’s “New” Washington Consensus is nothing short of a challenge to at least five decades of economic orthodoxy. It is exclusionary and anti-export. It weaponizes trade to achieve domestic and security goals. It is also a rejection of a rules-based international economic order in which the United States used to have a leading role and that served it well for decades. The “New” Washington Consensus no longer represents the belief that international trade is a win-win for all countries. Instead, it espouses a zero-sum logic whereby one country’s gain is the other’s loss and cooperation is ad hoc and transactional—cooperation is pursued if and when it suits US interests. This new strategy is myopic short-term thinking—it risks precipitating the disintegration of global trade into rivaling blocs, with the United States and China in opposing camps and other countries in the uncomfortable position of having to pick sides. And given the US protectionist stance, what is the incentive for third countries to join the United States? 

International trade currently is unpopular with Americans from the nationalist right to the progressive left ( 35 percent of Americans see international trade as a threat to the economy, while only 61 percent see it as an opportunity). Advocates for international trade certainly are not blameless here: In the past, they have overhyped the gains from trade agreements while underestimating distributional costs on lower-skilled labor, and they failed to anticipate localized recessions resulting from international competition. However, instead of yanking the pendulum toward neo-protectionism and techno-nationalism, one may consider updating and improving the existing rules-based order—call it Washington Consensus 2.0.

What would a Washington Consensus 2.0 look like? Domestically, it would capture the gains of liberalized trade, while offering effective protection from the downsides of globalization. The focus thereby would be on workers, not jobs . Rather than trying to save uncompetitive facilities and declining industries, the Washington Consensus 2.0 would promote job creation in distressed areas and improve transition assistance for those who have lost their jobs to international competition and technological advance. The Nordic countries and New Zealand teach us that an economy can be open and egalitarian at the same time. A Washington Consensus 2.0 would foster (WTO-compliant!) investment in infrastructure, R&D, education, and talent attraction, rather than bet on handpicked industries (one step in the right direction is the Bipartisan Infrastructure Law, passed under Biden’s watch in late 2021, though it remains diffuse and incongruous ). Comparative advantage cannot be compelled with handouts and protection, but it can grow organically given the intellectual and infrastructural fertilizer. A Washington Consensus 2.0 would mean focusing on technology adoption, not technology production: Diffusion and adoption of the best available technologies (even if imported) is more likely to create long-lasting economic benefits and larger innovative breakthroughs than a government trying to pick winning technologies (on that issue, recall France’s irrational, and costly, attachment to the telex at a time when the rest of the world was already using the internet). 

Internationally, a Washington Consensus 2.0 would mean more and deeper trade agreements since it is better to coordinate, not compete, with allies on public investments in complex areas such as high tech and decarbonization. This cooperation would remove commercial conflict and facilitate the spread of the best technologies. The United States should seek out comprehensive and enforceable trade agreements with a large membership, such as the TPP and T-TIP, not only to provide a veritable counterbalance to China’s heft—as originally intended by the Obama administration—but also to help promote technological diffusion and adoption of common international technical standards (including on labor, the environment, and AI). A Washington Consensus 2.0 would mean an immediate deblocking of WTO dispute settlement and a redoubling of efforts to engage in (an, admittedly, overdue) WTO reform that takes on rule flaunting by developed and developing countries alike. And if any WTO member were to block meaningful WTO reform, the United States should assemble the largest possible coalition in a future-oriented club of the willing (e.g., climate club ).

International trade is here to stay. The question is to what degree the United States will participate in it and whether the US will resume its leading role in defending the ground rules of global trade. Historical evidence shows that expanding trade has delivered tremendous value to the US economy. A Washington Consensus 2.0 could convince Americans that being protrade is neither unpatriotic, nor antiworker, anticlimate, or hypercapitalist. Being protrade means being in favor of a system that rewards innovation, efficiency, and dynamic growth; that makes the distributable pie larger; that actually attempts a fairer distribution of the spoils of trade; and that advances US diplomatic, security, and economic interests in the long term. 

About the Author

Simon Schropp is a managing economist at the global law firm Sidley Austin LLP. He previously worked for the World Trade Organization (WTO) Secretariat. The views expressed in this paper are solely the author’s and not those of his employer or its clients.

• Accounting, Economics & Finance
• Global Development & International Business

Trade Titans: The Impact of the U.S.-China Trade War on Global Economics

By zack sabadosa, mba ’24; maria claudia rengifo, mba ’24; pilar sofia resendez, mba ’24; adrian rosario beato, mps ’24; eman said, mba ’24; and kara styers, mba ’24.

The West, generally including Europe, North America, and Oceania nations, competes with China in economic, technological, geopolitical, and ideological fields. This rivalry is characterized by different trade policies, technological advancements, and strategic considerations that highlight the need for Western powers to evolve their strategies.

Economically, the U.S. and the E.U. employ trade policies, tariffs, and negotiations to counterbalance China’s economic influence, driven by concerns over unfair trade practices, market access, and intellectual property rights. The ongoing U.S.-China trade war is reshaping global supply chains, accentuating the economic dimension of this competition.

Technologically, the U.S. and China are making significant advancements. The West focuses on enhancing technological capabilities, particularly AI, while China progresses in cybersecurity, biotechnology, and semiconductor manufacturing. Increased investment in R&D and a commitment to innovation intensify the technological rivalry, strengthening the overall competition. (See Biden orders ban on certain US tech investments in China , Reuters, August 10, 2023.)

Geopolitically, the West implements measures closer to home to protect intellectual property and control technology exports. The CHIPS Act highlights the strategic importance of semiconductors in this geopolitical competition. Additionally, growing Chinese investments in Europe are causing increased scrutiny, further complicating the geopolitical landscape.

Ideologically, the West and China are in absolute contrast. The former emphasizes democratic values, human rights, and freedom, while the latter maintains its authoritarian regime. This ideological conflict significantly contributes to the broader competition between the two powers.

China’s economic development and capital investment policies have positioned it as an important force in the global economy over the past three decades. (See China’s Hundred-Year Strategy , Philadelphia Trumpet, August 2016.)Its increasing engagement with the Global South reshapes international relations, creating political opposition and highlighting differences in how the West competes with China. Navigating this complex landscape requires Western nations to evolve strategic approaches to address China’s multifaceted challenges effectively.

While the initial tensions were sparked in 2018, and a “Phase One” trade deal was signed in 2020 , the trade relationship between China and the U.S remains complex and continues to shape economic dynamics. One notable consequence is the recalibration of global supply chains. Firms, particularly in the technology and manufacturing sectors, have sought to diversify their supply sources to mitigate the impact of tariffs and trade uncertainties. This shift has led to a reconfiguration of production networks, impacting U.S. and Chinese businesses and those in other countries.

The trade war has also prompted a reassessment of economic interdependence. Countries worldwide are navigating the delicate balance between maintaining economic ties with both the U.S. and China while avoiding entanglements in geopolitical tensions. The ongoing dialogue between the two economic giants influences investor confidence as businesses closely monitor trade negotiations and policy developments for potential market impacts.

Moreover, the trade war has stimulated discussions on broader issues such as technological competition, intellectual property protection, and fair-trade practices. As the global economy continues to evolve, the legacy of the U.S.-China trade war resonates in business strategies, government policies, and the overall architecture of international trade relations.

Chinese investment in Europe sparks tension

From an investment perspective, Chinese investments in Europe have been scrutinized more closely. European countries concerned about national security and economic control have raised alarms about the implications of increased Chinese capital in some sectors. As China expanded its global economic footprint through initiatives like the Belt and Road Initiative, some European nations have started assessing the potential risks and benefits of increased Chinese investment. In 2022, the UK, Germany, Italy, and Denmark raised objections to over 60 percent of Chinese investment deals (See Chinese investment in Europe falls as watchdogs increase scrutiny , Financial Times, May 8, 2023.).

Infrastructure projects and technology sectors are the key industries at the forefront of this scrutiny. European governments and the European Union have started implementing stricter screening mechanisms and regulations to assess the impact of Chinese investments on national security and strategic interests. Some concerns range from intellectual property theft to potential influence over some infrastructure and technology sectors. This reflects a broad trend of nations in the West, including the U.S., reevaluating their economic relationships in the context of geopolitical considerations. This scrutiny highlights how geopolitical factors increasingly intersect with economic decision-making in the West when China is involved.

The U.S. government enacted the CHIPS Act, or Creating Helpful Incentives to Produce Semiconductors, in response to semiconductors’ critical role in modern technology and the vulnerabilities exposed during the 2020 semiconductor shortage. (See The Shifting Landscape of US-China Competition and What it Means for Your Organization , Fiscal Note, August 17, 2023.) Exacerbated by the COVID-19 pandemic, the shortage particularly impacted industries like automotive and electronics, revealing the extent of the U.S. reliance on semiconductor manufacturing in China and Taiwan.

Recognizing the national security and economic risks associated with this dependency, the CHIPS Act was designed to revitalize and bolster the U.S. semiconductor industry. The goal was multifaceted: to reduce U.S. reliance on foreign semiconductor production, particularly from China; to claim a more significant share of the global semiconductor market; to foster the development of advanced technological skills within the U.S. workforce; and to strengthen the nation’s economic and strategic autonomy.

The semiconductor industry is capital-intensive and R&D-heavy, so it may take the U.S. quite some time to decrease its reliance on China. However, the CHIPS Act reflects a strategic move in the broader U.S.-China tech rivalry, where political considerations play a significant role in addition to business dynamics. The act emphasizes the importance of addressing semiconductor dependencies highlighted during the 2020 pandemic and aims to position the U.S. as a more self-reliant and competitive player in the global semiconductor market.

Summary and closing

In response to the ongoing U.S.-China trade war, Western nations, led by the United States, are implementing a comprehensive strategy to safeguard their economic interests and technological advantages. The U.S., concerned about intellectual property theft, has identified culprits stealing proprietary information from major corporations like General Electric and General Motors for Use in Chinese businesses. (See Chinese Businessman Charged With Conspiring To Steal Trade Secrets , U.S. Department of Justice, February 26,2021; and Two Convicted in Conspiracy to Steal GM Trade Secrets Sentenced to Prison , FBI, Detroit Division, U.S. Attorney’s Office, April 30, 2013.) Measures include imposing tariffs on Chinese goods, discouraging American companies from establishing manufacturing sites in China, and employing counterintelligence tactics.

Furthermore, the U.S. actively promotes innovation in critical industries such as biotechnology to enhance competitiveness. At the same time, President Joe Biden’s 2023 executive order intensifies regulations on technology exports to China, particularly those with potential military applications. Chinese President Xi’s projection that China will economically surpass the U.S. in a century emphasizes the magnitude of the economic competition, urging Western powers to evolve strategically. (See Full text of Xi Jinping’s speech on the CCP’s 100th anniversary , Nikkei Asia, July 1, 2021.)

This multifaceted approach signifies a shift in global dynamics, with Western nations compelled to formulate careful and innovative strategies to maintain influence over China. The competitive landscape needs resilience and adaptability as the U.S. prioritizes protecting its interests closer to home. The geopolitical and economic rivalry demands meticulous planning and creative solutions to navigate the complex trade dispute and secure a prominent position in the face of China’s economic ambitions.

About the Authors

Zack Sabadosa, MBA ’24 , is a graduate of the Two-Year MBA program in the Samuel Curtis Johnson Graduate School of Management at the SC Johnson College of Business , and  a Roy H. Park Leadership Fellow as well as an Emerging Markets Institute Fellow. He has spent his time at Cornell University focused on private market activity, and interned in the summer of 2023 at OC&C Strategy Consulting’s New York City office. As a student, he has led the Johnson Consulting Club and has maintained two in-semester internships. Before Cornell, Sabadosa worked in technology as a business development manager advising financial institutions on cloud and data analytics transformations.

Maria Claudia Rengifo, MBA ’24 , is a graduate of the Two-Year MBA program at the Samuel Curtis Johnson Graduate School of Management, a Forté Foundation Ambassador, and an Emerging Markets Institute Fellow. She has spent her time at Cornell focused on finance and business analytics and interned in the summer of 2023 as a business improvement associate at Newmont Corporation. She has served as a Johnson Leadership Fellow, leading a team of five first-year MBA students through their core classes. She serves as a Johnson Admissions Group member, interviewing MBA candidates for the class of 2026. Rengifo started her career as a private equity analyst in the financial services industry and transitioned into the hard commodities industry, where she worked in operations, financial derivatives, and portfolio management.

Pilar Sofia Resendez, MBA ’24 , is a student in the Two-Year MBA Program in the Samuel Curtis Johnson Graduate School of Management, and is a Consortium Fellow. Resendez led the Hispanic American Business Leaders Association and cochaired the Johnson School’s 2023 Diversity Hosting Weekend. She has spent her time at Cornell University focused on brand management and sustainability. Her internship was at Gallo in Modesto, CA, where she will be starting full-time in 2024. Prior to Cornell, Resendez worked in consulting, setting finance strategies for consumer goods organizations.

Adrian Rosario Beato, MPS ’24, is a rising accounting professional and a graduate of the Master of Professional Studies in Management – Accounting Specialization program at the Samuel Curtis Johnson Graduate School of Management. He earned a bachelor’s of science from Ithaca College, where he was honored with the Peggy Ryan Williams Award and other awards. Beato has interned at Tonneson and Co. and PwC. As a leader, he served as the president of the National Association of Black Accountants at Ithaca College, enhancing professional growth for students of color. He was active in Beta Alpha Psi and the Leadership Academy, developing accounting and leadership programs. Beato will join PwC full-time in 2024.

Eman Said, MBA ’24, is a graduate of the Samuel Curtis Johnson Graduate School of Management and a licensed occupational therapist. Her fellowships at the Johnson School have included the Forté Foundation, the Consortium, the Emerging Markets Institute, Life Sciences in Entrepreneurship, and Fried Fellows. She led the Johnson Healthcare Club and held leadership positions in the entrepreneurship club at Johnson and as an ally for Access Johnson, a club dedicated to the Johnson community who identify as neurodivergent or hold a disability. Said completed a corporate finance immersion at the Johnson School and cochaired the EMI Mark Mobius Pitch Competition. She interned at CVS Health in specialty product development and innovation in 2023 and will be starting full time at Medtronic, in their leadership development rotational program, following graduation.

Kara Styers, MBA ’24, is at graduate of the Two-Year MBA at the Samuel Curtis Johnson Graduate School of Management. She holds fellowships including the Roy H. Park Leadership Fellowship, the Emerging Markets Institute Fellowship, and the Life Sciences Technology and Innovation Fellowship. Styers led the Association of Veterans at Johnson and cochaired the EMI Corning Case Competition. Her internship was at Bain & Company in Austin, Texas, and she will be starting there full time in 2024. Prior to Johnson, Styers served as a captain and engineer officer in the U.S. Army.

The US-China Trade War and Global Reallocations

Fajgelbaum, Pablo, Pinelopi Goldberg, Patrick Kennedy, Amit Khandelwal, and Daria Taglioni. 2024. "The US-China Trade War and Global Reallocations." American Economic Review: Insights, 6 (2): 295-312.

The US-China trade war created net export opportunities rather than simply shifting trade across destinations. Many "bystander" countries grew their exports of taxed products into the rest of the world (excluding the United States and China). Country-specific components of tariff elasticities, rather than specialization patterns, drove large cross-country variation in export growth of tariff-exposed products. The elasticities of exports to US-Chinese tariffs identify whether a country's exports complement or substitute the United States or China and its supply curve's slope. Countries that operate along downward-sloping supplies whose exports substitute (complement) the United States and China are among the larger (smaller) beneficiaries of the trade war.

Global Growth Is Stabilizing for the First Time in Three Years

But 80% of world population will experience slower growth than in pre-COVID decade

WASHINGTON, June 11, 2024 — The global economy is expected to stabilize for the first time in three years in 2024—but at a level that is weak by recent historical standards, according to the World Bank’s latest Global Economic Prospects report.

Global growth is projected to hold steady at 2.6% in 2024 before edging up to an average of 2.7% in 2025-26. That is well below the 3.1% average in the decade before COVID-19. The forecast implies that over the course of 2024-26 countries that collectively account for more than 80% of the world’s population and global GDP would still be growing more slowly than they did in the decade before COVID-19.

Overall, developing economies are projected to grow 4% on average over 2024-25, slightly slower than in 2023. Growth in low-income economies is expected to accelerate to 5% in 2024 from 3.8% in 2023. However, the forecasts for 2024 growth reflect downgrades in three out of every four low-income economies since January. In advanced economies, growth is set to remain steady at 1.5% in 2024 before rising to 1.7% in 2025.

“Four years after the upheavals caused by the pandemic, conflicts, inflation, and monetary tightening, it appears that global economic growth is steadying,” said Indermit Gill, the World Bank Group’s Chief Economist and Senior Vice President. “ However, growth is at lower levels than before 2020. Prospects for the world’s poorest economies are even more worrisome. They face punishing levels of debt service, constricting trade possibilities, and costly climate events. Developing economies will have to find ways to encourage private investment, reduce public debt, and improve education, health, and basic infrastructure. The poorest among them—especially the 75 countries eligible for concessional assistance from the International Development Association—will not be able to do this without international support.”

This year, one in four developing economies is expected to remain poorer than it was on the eve of the pandemic in 2019. This proportion is twice as high for countries in fragile- and conflict-affected situations. Moreover, the income gap between developing economies and advanced economies is set to widen in nearly half of developing economies over 2020-24 —the highest share since the 1990s. Per capita income in these economies—an important indicator of living standards—is expected to grow by 3.0% on average through 2026, well below the average of 3.8% in the decade before COVID-19.

Global inflation is expected to moderate to 3.5% in 2024 and 2.9% in 2025, but the pace of decline is slower than was projected just six months ago. Many central banks, as a result, are expected to remain cautious in lowering policy interest rates. Global interest rates are likely to remain high by the standards of recent decades—averaging about 4% over 2025-26, roughly double the 2000-19 average.

“Although food and energy prices have moderated across the world, core inflation remains relatively high—and could stay that way,” said Ayhan Kose, the World Bank’s Deputy Chief Economist and Director of the Prospects Group . “That could prompt central banks in major advanced economies to delay interest-rate cuts. An environment of ‘higher-for-longer’ rates would mean tighter global financial conditions and much weaker growth in developing economies.”

The latest Global Economic Prospects report also features two analytical chapters of topical importance. The first outlines how public investment can be used to accelerate private investment and promote economic growth. It finds that public investment growth in developing economies has halved since the global financial crisis, dropping to an annual average of 5% in the past decade. Yet public investment can be a powerful policy lever. For developing economies with ample fiscal space and efficient government spending practices, scaling up public investment by 1% of GDP can increase the level of output by up to 1.6% over the medium term.

The second analytical chapter explores why small states—those with a population of around 1.5 million or less—suffer chronic fiscal difficulties. Two-fifths of the 35 developing economies that are small states are at high risk of debt distress or already in it. That’s roughly twice the share for other developing economies. Comprehensive reforms are needed to address the fiscal challenges of small states. Revenues could be drawn from a more stable and secure tax base. Spending efficiency could be improved —especially in health, education, and infrastructure. Fiscal frameworks could be adopted to manage the higher frequency of natural disasters and other shocks. Targeted and coordinated global policies can also help put these countries on a more sustainable fiscal path.

Download the full report: https://bit.ly/GEP-June-2024-FullReport

Download growth data:   https://bit.ly/GEP-June-2024-Data

Download charts: https://bit.ly/GEP-June-2024-Charts

Regional Outlooks:

East Asia and Pacific:  Growth is expected to decelerate to 4.8% in 2024 and to 4.2% in 2025. For more, see  regional overview.

Europe and Central Asia:  Growth is expected to edge down to 3.0% in 2024 before moderating to 2.9% in 2025. For more, see  regional overview .

Latin America and the Caribbean:  Growth is expected to decline to 1.8% in 2024 before picking up to 2.7% in 2025. For more, see  regional overview .

Middle East and North Africa:  Growth is expected to pick up to 2.8% in 2024 and 4.2% in 2025. For more, see  regional overview.

South Asia:  Growth is expected to slow to 6.2% in 2024 and remain steady at 6.2% in 2025. For more, see regional overview.

Sub-Saharan Africa: Growth is expected to pick up to 3.5% in 2024 and to 3.9% in 2025. For more, see  regional overview.

Website:  www.worldbank.org/gep

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