A WTO blog by the Deputy Director General (DDG) Anabel Gonzalez published on 16 May 2023 noted that decisions on allocation of political and economic resources must be based on sound research and analysis. Currently it is difficult to implement growth-friendly trade policy owing to the fast technological changes, unpredictable climate events and other pressing global challenges. It is therefore important to take into account the work of academics and researchers in taking decisions on trade policy.
Since Ricardo explained the gains from trade that could result from specialization according to comparative advantage, economic research has moved further. The trade theory expounded by Paul Krugman explains that international trade can increase the productivity of firms by expanding markets and bringing economies of scale. Marc Melitz notes that international trade brings about productivity gains by making the least productive firms shrink and consequently concede a greater share of the market to more productive businesses.
The Swedish National Board of Trade recently produced a paper setting out the latest policy research on the effect of trade on productivity, which is a key driver of sustained growth. The paper notes that links between trade and productivity are stronger than previously thought, and there is consistent empirical evidence of benefits to productivity from improved access to intermediate goods. It is therefore a positive policy to remove trade barriers to parts and components.
The largest effects on productivity relate to imports, and there are also productivity gains from accessing export markets. Trade agreements should therefore focus on facilitating both import and export opportunities. Productivity can be increased when technological diffusion is associated with opening up trade. Recent theory indicates that international trade is carried out within industries rather than via inter-industry trade. There could therefore be further trade opportunities available across segments of the value chain, that are not necessarily within particular sectors. To protect social groups who may lose out from trade liberalization, it is necessary to ensure that social adjustment policies can target relief to manage this problem.
If open and transparent trade policies are to deliver innovation and growth, these policies must be integrated within wider strategies that aim for inclusive and sustainable economic growth and development.
Many of the results of research are counterintuitive and if they do not resonate with the public or with government officials, they are less likely to be used to inform decisions and achieve better trade outcomes. More resources should be invested to explain the research to policymakers and to the public at large. This can guard against the possibility that policies are adopted that are contrary to tested economic theories.
In reality, the policymakers could benefit from research that helps them pursue good, rather than perfect outcomes. Economists must therefore take account of the details of practical policymaking to find solutions that are workable in the real world. Economic policy also needs to understand the local context and conditions, as policies that work in an industrialised country may not work in a poorer land-locked economy or a country entangled in conflict. Data and analysis are very important at the beginning of a policy process, when trade officials are developing a common understanding of how the issues should be approached.
Research into the role of trade in managing global challenges is more important than ever. Researchers should increase their efforts to bring more evidence of the important role that trade and economic integration play in resolving international issues. There can be significant returns from deepening the dialogue between trade policymakers and academics, at the WTO and elsewhere. The trade policymakers can help academics to keep their theories rooted in reality; and academics can help policymakers to reach better trade outcomes.
