Wednesday, July 16, 2008

World Trade Report 2008: Trade in a Globalizing World

The WTO, in a new report Trade in a Globalizing World, extols virtues of free trade and at the same time reminds us that deeper integration has not benefited all sections of society. It argues that globalization, which is basically driven by technological innovation (chiefly low transportation, communication, production, and manufacturing costs), political change, and economic policy choices, has led to increased fusion of product, capital, and labor markets internationally and resulted in a more efficient allocation of economic resources. The report examines “the gains from international trade and the challenges arising from higher levels of integration.” This is what the report has:

The Report explores a range of interlinking questions, starting with a consideration of what constitutes globalization, what drives it, the benefits it brings, the challenges it poses and what role trade plays in this world of ever-growing interdependency. We ask why some countries have managed to take advantage of falling trade costs and greater policy-driven trading opportunities while others have remained largely outside international commercial relations. We also consider who the winners and losers are from trade in society and what complementary action policy-makers need to take in order to secure the benefits of trade for society at large. In examining these complex and multi-faceted questions, the Report reviews both the theoretical trade literature and empirical evidence that can help to give answers to these questions.

The report looks at the total change in output (product, capital, and labor outputs), which obviously has increased relative to cost structure, but does not fully explore distributional impacts of the existing model of globalization led by Western interest(it discusses production fragmentation based on cost-effectiveness)! However, it discusses the conflicts between globalization and domestic trade policies and its impact on the people. The rate of waning of support for globalization would depend on the “balance between the need for open markets and complementary domestic policies, along with international initiatives that manage the risks arising from globalization.”

A warning against autarky:

When different sources of gains from trade are taken together, it has been shown that protectionist policies may carry significant economic costs. However, the benefits from opening up to trade may not be equally distributed across countries.

Poor countries face hindrances in the process of evolution of production networks because of poor quality of infrastructure, high cost of establishing a business, and poor quality of institutional frameworks (in other words unfavorable trade costs and supply-side constraints). Moreover, the report argues that poor countries are not gaining as much as the richer ones because the pace of technological change (which the report argues is the main cause of any negative impact on poverty and inequality), the timing of trade policy change, the pre-existing level of protection and a range of factors relating to such factors as the structure and functioning of markets, education, and basic infrastructure. It asserts that trade helps alleviate poverty, which is still debatable if we look at he progress in the sub-Saharan Africa.

In general, however, empirical evidence continues to support the idea that trade is good for the poor, although trade is likely to affect individual households differently. The strength of the poverty-reducing effect of trade appears to be country-specific and will to a large extent depend on the policies accompanying trade reform.

Here is Pascal Lamy, director general of the WTO:

Countries missing out on international production opportunities risk being marginalized from globalization – indeed, this is a vivid example of how globalization can leave countries and societies behind. But the good news is that much of what can be done to avoid this outcome is in the hands of responsible government.

The report is informative and will be a good refresher/review of trade theories and controversies (starting from Ricardo to recent ones)!