Understanding Deglobalization: What the Backlash to Trade Liberalization Means for Business Growth and Global Inequality
Extensive trade liberalization, often referred to with the shorthand term “globalization,” stands as one of the most transformative economic events of the last century — and also one of the most controversial. To some, the most important effect of globalization has been the rise in global living standards through the expansion of the middle class and the sizable reductions in poverty in countries — such as Japan, South Korea, Singapore, China, Vietnam, Malaysia and Bangladesh — that have leveraged export-oriented production and trade to their advantage. Other analysts focus on how trade liberalization has created winners and losers, and increased economic fragility.
In response to these downsides, many of which are fueled by price competition from foreign entities and the greater ease of shifting jobs from high- to low-wage parts of the world, some countries are reconsidering their attitudes toward greater trade openness. Given these trade-offs between reducing global inequality and protecting domestic interests, is globalization here to stay, or will low- and middle-income countries (LMICs) need to find alternative sources of growth in an increasingly protectionist world?
While there is a continuing debate around who has reaped the greatest rewards from globalization, a key consideration from an economic development perspective is how trade impacts the production possibilities of firms and the earnings of workers in LMICs. As countries reassess the extent of their engagement in international trade and as political support for protectionist policies grows, we’ve compiled relevant research insights to help illuminate the dynamics and repercussions of international trade. Our goal is to better understand what the current backlash might mean for business growth and poverty reduction in low- and middle-income settings, and for inequality across and within countries.
We will explore these questions below — with one small caveat: Globalization has important consequences in terms of environmental impact. And increased flows of capital across borders can also have disruptive effects on economies. Though these topics are worthy of further exploration, we limit our discussion to the economic impacts of global trade in goods and services in this article.
Globalization has broadly been a catalyst for global growth
For a number of LMICs, the expansion of international trade in the second half of the 20th century was an integral part of their economic transformation. As a percentage of GDP, trade grew from roughly one quarter of the world economy in 1960 to over one half by 2015. By far the largest enabler of this growth was the reduction of tariff rates: They fell by half in low-income countries during the 1980s and 1990s. An acceleration in export-led manufacturing growth followed in East and Southeast Asian economies such as China, Taiwan, South Korea, Singapore and Japan. These countries made investments that took advantage of expansions in high-wage, productive sectors such as manufacturing and services, and growing access to high-income consumers in other countries, to reap the rewards of an increasingly globalized world economy.
As a result, Japan found success in the automotive industry, becoming the world’s largest car manufacturer in 1981, with production accounting for almost a third of the global total. In China, South Korea and Taiwan, modern microchips — used in virtually every electronic device — became a production staple, and technological developments during the early part of the 21st century have only further entrenched the role of tech manufacturing in the growth of these economies. High-income economies were also strong advocates — and indeed beneficiaries — of trade liberalization in its early stages. During the 1990s, exports accounted for almost a quarter of the United States’ growth in output.
One of the key channels through which international trade impacts economic growth is through its indirect impacts on productivity across domestic firms. As Ana Cecilia Fieler, affiliate of the Yale Economic Growth Center (EGC), has found in her work with co-authors examining manufacturing and trade in Brazil (see a summary of her research here), LMIC-based firms that are engaged in international trade are more likely to upgrade their technology given the nature of demand from foreign customers. This has important indirect effects on economy-wide productivity, since this leads many non-importing firms to upgrade their technology as well, just due to the fact of being in the same supply chains as firms that are importing and exporting. These firm-to-firm benefits, in combination with factors such as human capital investments and support for small and medium-sized firms, differentiate the trade and growth experiences of regions such as Latin America from that of East Asia.
The Trade-Offs and Unequal Benefits of Trade Liberalization
However, while the global economy may have benefitted overall from trade liberalization, this growth has not been spread equally. Specific localities and groups of workers have gained at the expense of others. These disequalizing effects have not just been concentrated in high-income countries but have played out in low-income ones as well. As a result, despite globalization seemingly catalyzing overall growth in both high- and low-income economies, the argument started to gain traction that it was moving wage jobs that required a high school degree or less from high- to low-wage countries. While this debate continues, the geographic and local effects of globalization (also known as “spatial effects” in the literature) have become more apparent. Borderless company activity due to international trade means that communities which depend on a single dominant employer lose out on more than just jobs if operations are moved abroad. There are also broader local effects and knock-on implications for tax raising, spending on public services and social divisions, which can leave entire communities in distress, and feeling as if they have been harmed more than helped by the forces of globalization.
Recent research has shown that these imbalances in who gains and who loses from trade expansion are similarly apparent in low- and middle-income economies. A recent literature review by Amit Khandelwal, affiliate of the EGC and David Atkin at MIT found that since the vast majority of firms in low-income countries are not only small but also informal, the ability of these firms and their communities to receive the full benefits of trade is much more limited than previously imagined. This is apparent in the case of Vietnam, where lower U.S. tariffs on exports as a result of the U.S.-Vietnam Bilateral Trade Agreement led to increases in Vietnamese firm productivity. However, these gains came from the reallocation of resources, from smaller firms that were less efficient to larger companies that were more efficient. These smaller enterprises faced barriers to participating in the export market, which included substantial costs, such as government registration fees and insurance and shipping expenses, that small firms were too credit-constrained to overcome.
Other lower-income countries have also faced trade-offs alongside the gains from trade liberalization. In Colombia, reductions in tariffs on imports in the 1980s and 1990s were largely focused on sectors employing low-skilled wage labor. These wage workers saw their earnings fall as firms shifted from purchasing domestic goods to buying lower-priced imports. Meanwhile, Indonesia’s import tariff reforms have been shown to have reduced the wages of workers in companies that only sell domestically, in comparison to larger, exporting firms. And in India, work co-authored by EGC affiliates Michael Peters and Fabrizio Zilibotti, and Yale graduate student Tianyu Fan, finds that the growth of the consumer services sector generated by trade openness in the 1990s resulted in benefits that were skewed toward urban locations and high-income households, while rural workers employed in the slower-growing agricultural sector were excluded from this service-driven growth. While many of these impacts are context-dependent, it is clear that the benefits of trade are not dispersed equally. As a result, addressing the trade-offs between the increases in efficiency and the distributional consequences caused by trade liberalization has become a policy and political priority in low- and middle-income contexts as well as more affluent ones.
A recent “Voices in Development” podcast that we produced at Yale EGC illuminated these competing dynamics and consequences of international trade. In that discussion, Penny Goldberg, a trade scholar and former Chief Economist at the World Bank, outlined how small economies like Greece, where she was born, used international trade to reduce poverty in the second half of the 20th century. Simultaneously, competition from imports coming into high-income markets, such as the U.S. and much of Europe, did not disadvantage all workers with similar levels of education across these countries. Instead, it affected specific sub-geographies, raising or lowering income and wealth in a given area based on the changing international comparative advantage of dominant local manufacturing firms.
How Trade Protectionism in High-Income Economies Can Harm LMICs
As the notion that trade liberalization has exacerbated inequality has made its way into the political sphere, some countries have taken significant steps back in their trade openness. While actual trends in world trade have recovered after a sharp drop caused by the COVID-19 pandemic, the trade openness index has been in decline since around 2010, ending the uninterrupted growth it had experienced since the end of World War II.
High-income countries are arguably the biggest proponents of this retrenchment. The U.S. has blocked China’s access to crucial technology, and the U.S. and Europe have imposed export restrictions on materials needed for the production of COVID-19 vaccines. Developments like the ongoing U.S.-China trade war, the global energy crisis fueled by the war in Ukraine, and the turn toward protectionism in many countries’ political agendas suggest we may be approaching the “end” — or at least the slowdown — of globalization. According to Goldberg, this process of “deglobalization” will have consequences for consumers, as greater protectionism leads to higher prices, while also posing a threat to global coordination on salient issues such as climate change.
An even more pressing consequence is the threat deglobalization poses to low-income economies in terms of lost growth potential, as access to once-open markets becomes increasingly restricted. Firms in countries such as Singapore, Taiwan, Vietnam and Bangladesh that have relied on growing global demand for their exports are potentially facing a long-term decline in international business and trade. Some researchers expect the impact of this decline to depend on the strength of the internal market in these economies. But whatever its ultimate impact, the missed opportunities created by a slowdown in trade for smaller and slower-growing countries in South and Central Asia, Latin America, and sub-Saharan Africa present an under-recognized challenge to poverty reduction and business growth in these geographies.
There is a risk that this slowdown may erode the gains in living standards achieved by LMICs that embraced free trade and invested in their populations to more equitably take advantage of emerging global economic opportunities. For instance Bangladesh, as the world’s second-largest clothes exporter, has seen exports tumble as a result of the global economic slowdown, and recently had to obtain an IMF bailout. According to Yale EGC affiliate Mushfiq Mobarak, Bangladesh is just one example of how seismic shifts in the interconnected global economy will hurt poorer countries the most.
What Does the Future Hold for Globalization?
The global economy is expected to be in a downturn for the next few years, with the IMF predicting that a third of countries will enter a recession. Protectionism in the short run is likely to be a factor in how deep and long-lasting the global slowdown will be. Countries will continue to approach trade strategically to suit their best national interest. However, a developmentally sound approach would be to focus on where trade has the most gains to deliver, in terms of preventing price rises in all countries and enabling poverty reduction in low- and middle-income settings. Otherwise, there is a risk of “throwing the baby out with the bathwater,” as countries pursue self-serving responses which can do more global harm than good.
While rich countries grab the trade headlines these days, the future of global trade is very much in the hands of LMICs. Despite trade restrictions from high-income nations protecting their domestic industries, China is a leading global actor that has spent the past decade building trade-related infrastructure throughout the world. India has negotiated a host of preferential trade agreements in recent years, including 13 bilateral trade agreements and four plurilateral agreements with multiple countries. These agreements have produced modest results to date, but they provide a basis for deeper engagement despite the global turn away from multilateralism. Similarly, 54 member states of the African Union have signed the African Continental Free Trade Area Agreement, working toward increased trade within the continent.
In her podcast interview, Goldberg cautions that national governments will need to recognize the specific local effects of trade and address them head-on as part of smart redistributive policies. This action is key to renewing and realizing the promise of globalization. This can ensure that countries benefit from the positive impacts of trade, while also helping the specific regions and populations that experience any negative effects to transition systematically to new economic opportunities over time. In this century of large movements of goods and people across borders, rapid technological change, and climate breakdowns, achieving the global goals of poverty reduction and decreased inequality will require a widespread recognition of the interdependence between high- and low-income countries. While the current prioritization of strictly national interests might appear politically attractive and expedient, we will ultimately rise or fall together.
Photo courtesy of Erik Odiin.