Trade Thoughts, From Geneva: Building On Research For Better Trade Outcomes

To craft impactful trade policies, political will and good intentions is just a starting point. Decisions about how best to allocate scarce political and economic resources must be rooted in analytically sound, policy-relevant, timely research and analysis. Yet, rising geopolitical tensions, rapid technological changes, unpredictable climate events and other pressing global challenges are making the difficult job of designing and implementing growth-enhancing trade policies even harder.

This is why academics, researchers and think tanks have much to contribute to help trade policymakers make better choices and deliver improved results, including at the World Trade Organization (WTO).

What does research say about the gains from trade?

Economic science has provided a strong foundation for trade policymaking ever since David Ricardo developed the theory of comparative advantage over two centuries ago. Since then, economists have shown that there is much more to the gains from trade than just specialization according to comparative advantage. In the new trade theory pioneered by Paul Krugman, international trade raises the productivity of firms by enlarging markets, allowing firms to reap economies of scale. And in the new-new trade theory pioneered by Marc Melitz, international trade brings about productivity gains by forcing the least productive firms to contract and leaving a greater share of the market for the most productive firms.

A recent paper by the Swedish National Board of Trade summarizes the latest policy research on the impact of trade in goods on productivity — a key driver of sustained growth — and inclusive economic prosperity. The paper lists six findings:

1. There are stronger links between trade and productivity than previously thought, and trade reforms can have a bigger bang for their buck than anticipated 20 years ago.
2. There is strong, consistent empirical evidence of productivity effects from improved access to intermediate goods, which is why it makes sense to remove trade barriers to inputs, parts and components.
3. The most significant productivity effects relate to imports, but there are productivity gains associated with accessing export markets. Thus, trade agreements should focus on improving both import and export opportunities.
4. When technological diffusion is associated with trade, and with opening up trade, this can greatly increase productivity.
5. According to recent trade theory, international trade today largely takes place within industries rather than via inter-industry trade. This suggests that there are further potential trade opportunities available across segments of the value chain, not necessarily tied to clearly specific sectors.
6. There are winners and losers associated with trade liberalization. This is why social adjustment policies and other public policies are key, even if more research is needed to determine the best policy designs.

Thus, as this paper suggests, there is abundant theoretical and empirical evidence that countries that turn their back on international trade do so at their own peril. However, research also finds that open and transparent trade policies are not a silver bullet. If they are to deliver, these trade policies must be integrated into broader strategies focusing on inclusive, sustainable and resilient economic growth and development.

Adjusting the connection between trade research and policymaking

Solid though they are, many of the research findings from the trade literature are, nevertheless, counterintuitive, and do not resonate, even with the informed public or with government officials. This severely hampers the potential of these results to inform decisions and drive good trade outcomes. It also suggests that more resources should be invested to explain them better — not just to policymakers, but also to the public at large — to ensure that good evidence and analysis are not ignored, and to guard against the adoption of policies that would go against decades of theoretical and empirical validation.

It is also often the case that trade economists advocate “first-best” solutions, without taking into account the political constraints that policymakers face. Sometimes second-best, or even third-best, is the only policy that is feasible in the real world, and policymakers would benefit from research that helps them pursue the good, rather than the perfect. To borrow from the Nobel laureate Esther Duflo, economists need to think and act more like plumbers, by getting to grips with the details and messiness of policymaking in order to find solutions and influence policy outcomes in ways that are workable in the real world.

The same is true of understanding local context and conditions, as policy implementation does not happen in the abstract, so what works in an advanced country may not work in a poor land-locked economy or a conflict-afflicted state. And what is less obvious, but just as important, is timing. Data and analysis are very important in the early stages of a policy process, when trade officials are trying to frame the problem at hand and develop a common understanding of how it can be tackled. They are often less useful at the final stages of a trade negotiation or other policy process, where politics normally take over.

Research into the role of trade in global challenges is needed, today more than ever

As the current debate about globalization and deglobalization unfolds, there is a view that trade is part of the problem when it comes to confronting the all-important challenges of reducing poverty and inequality, supporting sustainability, and fostering peace and security. Policymakers and the people they serve need researchers to step up their efforts to bring fresh evidence on the critical role that trade and economic integration play in solving global challenges. Economists at the WTO and at the International Monetary Fund have made important contributions in this area, for example by modelling the significant welfare losses that would result from a fragmented global economy.

But more is needed. Take the case of subsidies, and the question of whether new rules may be needed to ensure a global level playing field, given that many unforeseen challenges have emerged since those rules were first negotiated several decades ago. This is a hot topic in trade circles, but not an easy one to tackle, as the economics of subsidies are not black and white. For example, a better understanding of the design, implementation and spillover effects of climate-related government support is key to minimize potential negative impacts and trade tensions, which could otherwise weaken the trading system and make it more difficult and costly to attain sustainability goals.

Paradoxically, in an age awash in information, it is sometimes difficult to distinguish fact from fiction, evidence from speculation, analysis from ideology. More than ever, there are huge returns to deepening the dialogue between policymakers and academics, not least at the WTO. Policymakers can help academics remain grounded in the real world, while academics can help policymakers achieve trade outcomes that are better for people, prosperity and the planet.