From:
Drysdale, P., Garcia-Herrero, A., Kumar, N., Canuto, O., Subrahmanyam, B.V.R. (2025). Growth Implications of a Fractured Trading System. In: Bery, S., Kapoor, K., Arcand, JL. (eds) Navigating Challenges for Sustainable Growth. Springer, Singapore.
https://doi.org/10.1007/978-981-97-7894-2_3
Dear colleagues.
What I will try to do is basically to illustrate something that Professor Peter has so aptly spoken. Namely, if we want to understand the growth implications, particularly costs of moving towards a fractured trading system, we must use as a benchmark exactly what happened over the period which is usually called as hyper-globalization or globalization 2.0.
So, what I’ll try to highlight is exactly what aspects were those, so as to use them as a benchmark to think about the costs of a fragmentation of the trading system. What was hyper-globalization or, like Professor Richard Baldwin calls it, Globalization 2.0? In the eighties and nineties, particularly the nineties, we saw the manifestation of the outcome of what one may call a tectonic plate shift under the global economy. This was the combination of three things:
First, a cluster of technological innovations not only in information and communication technology but also in transportation. The containerization allowed the fragmentation of manufacturing processes to levels previously unthinkable.
Second, the reasonably widespread adoption of trade opening policies. Literally, in most countries in the world, particularly developing countries, there was a move towards reducing tariffs and non-tariff barriers to trade.
Third, the incorporation, almost overnight, of 1 billion workers with lower wage aspirations into the global supply of labour available for market economies. I’m referring here not only to the downfall of the Berlin Wall but also to President Deng Xiaoping’s creation of special economic zones that allowed for a tremendous rise in exports and imports as a share of China’s GDP.
The results? Well, there was substantial growth of GDP per capita in emerging markets and developing economies. The correlation between trade insertion in exports and increases in GDP per capita can be seen in Chart 1. And, as Professor Peter mentioned, there was a change in the composition of the global economy and trade, with the rising weights of not only China but also other emerging markets and developing economies.
This resulted in a significant reduction in poverty rates. At the same time, there was a double movement with respect to inequality. The world became less unequal when it came to per capita income, but there was a simultaneous rise in within-country inequality, particularly in advanced economies, as depicted in Chart 2. These were direct results of trade integration.
Along with higher foreign trade came the transfer and local absorption of knowledge and technology in machines, equipment, and also intangible forms, accompanying the formation of global value chains. This is evident, for instance, in estimates made by the IMF on how foreign knowledge contributed to labour productivity growth among advanced economies and also in emerging market economies. As shown in Chart 3, the IMF estimates that from 2004 to 2014, foreign knowledge accounted for about 0.7 percentage point of labour productivity growth a year, what corresponded to 40 per cent of the sectoral productivity growth. This is substantial after a decade in which that contribution reached 0.4 percentage point a year.
And before anyone thinks these results are only due to China, they are robust even when one excludes China from the analysis. China is, of course, a unique case because of its size and growth rates. But the fact of the matter is that this is an observation that can be generalized about the transfer of knowledge.
Of course, this contribution of foreign knowledge translates itself into higher results when accompanied by domestic endeavours. As our colleagues at the World Bank have highlighted in many studies, there is a component of technological capabilities that is idiosyncratic and local. Capabilities must be present in order to utilize foreign knowledge effectively. This has been the case for countries like South Korea and China, as evidenced by their patent filings and R&D expenditure.
Okay, so then we delve into the phase of slowbalization. Looking in a bit more detail, we note in Chart 4 that the cross-border flows of goods, services, and capital slowed after the global financial crisis. There are several hypotheses about this. One of them is the possibility that the major wave of fragmentation associated with manufacturing had reached a plateau. For it to continue as a driving force, we would need to see what happened in China replicated in other countries. This started to happen slightly with countries like Vietnam. India remains the significant absentee in this process.
Another hypothesis is that advanced countries transitioned more towards service-based economies. Services are less trade-intensive, and the internationalization of services hasn’t occurred to the same degree as we’ve seen with manufacturing.
It is important to highlight, as I said, that the average industrialized country saw an increase in the Gini Index from 30 to 33 in the 20 years between 1988 and 2008. Now, to avoid any misunderstanding, it must be clear that globalization cannot be held mostly responsible for the rise in economic inequality in advanced economies.
As it was well remarked in our previous session, technological change had more to do with that. Technological change, combined with a lack of appropriate social protection systems in some advanced economies, is to blame for most of worsening of job and income conditions at the bottom of pyramids in countries like the U.S. or the United Kingdom. Globalization cannot be scapegoated despite the claims blaming imports of goods from Mexico and China as responsible for doldrums faced by low- and middle-income workers in the U.S., or blaming labour immigration as a motivation for the Brexit decision. The fact of the matter is that globalization cannot be held responsible for that.
Then the global economy went through the recent multiple shocks, the perfect-storm combination of a pandemic, war in Ukraine, manifestations of climate change, the emergence of the so-called ‘new Washington consensus,’ and the ongoing technological rivalry.
Let me touch on the impacts of those shocks. The permanent impacts of the pandemic will be limited. The pandemic introduced a trade-off between resilience and efficiency. But the fact of the matter is that this doesn’t lead to reshoring. As the milk-formula experience last year in the United States showed clearly, if you bring back everything, then you’ll remain as exposed to potential risks as if you were when relying on global supply chains, given the possibility of shocks at home. On the other hand, depending on the sector, this logic will lead maybe to some costly diversification or duplication of links depending on the sectors, but not a reversal of globalization. As some colleagues and I have shown in a policy brief for the T20 this year, the recovery of manufacturing output, particularly in technology sectors, was really nothing commensurate with the stigma established with the pandemic.
Now, where the danger lies is in the rise of national security commanding economic policies, as it has been singled out as a justification for trade restrictions in those sectors where ‘dual use’ of technologies and goods and services for both civil and military reasons is possible. Indeed, if one looks at trade and FDI restrictions, the rise has been unequivocal, often justified based on national security reasons.
The transmission channels of the fragmentation will be a reversal of the path along which we have attained the gains that we approached before. As we are at the beginning of this process, any estimate of the costs is based on simulations on different models. For illustration, Chart 5 displays results of some studies presented in a recent seminar at the IMF on several models coping with different aspects of the process of trade fracturing.
One can generalize the following from those studies:
– The costs are greater the deeper the fragmentation.
– Reduced knowledge diffusion due to technological decoupling is a powerful negative amplifier of the trade channel.
– Emerging markets and low-income countries are most at risk from trade and technology fragmentation.
– Transition costs can be considerable, in some cases even exceeding the final trading impact.
– The estimates provided are not the upper bound.
To finalize, the G20 might not address issues of national security directly, but there’s much they can do, especially regarding the trade-offs between resilience and efficiency, designing policies to avoid resorting to the least discretionary breadth.
Thank you!
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Excelente texto, abordou questões essenciais.