How Trade Protectionism in High-Income Economies Can Harm LMICs

[mouakter13]

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.



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 australia whatsapp number data 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.