By Sharon Atieno
With the first sustainable development goal (SDG) calling for zero poverty, trade continues to play a significant role in narrowing the income gap between developing and developed nations while promoting inclusiveness.
According to the 2024 World Trade Report, the rapid expansion in international trade over the past thirty years since the existence of the World Trade Organization (WTO) has contributed to global per capita income increase including in low- and middle-income economies where it has nearly tripled.
“Over the past three decades, open global markets, underpinned by the WTO, gave rise to a boom in trade, enabling the productivity gains that came with greater specialization, scale and competition. Lower-priced imports lifted household purchasing power, especially at the bottom of the income distribution. As more developing economies reformed at home and tapped into external demand for goods and services, their share in global trade increased sharply,” WTO Director-General Ngozi Okonjo-Iweala says in her foreword to the report.
The report notes that with strong income growth in low and middle-income countries, the proportion of their populations living in extreme poverty decreased from 40 per cent in 1995 to under 11 per cent in 2022.
According to the report, trade policy reforms play a crucial role in this growth, with trade cost reductions increasing global GDP by almost seven per cent between 1995 and 2020 and by 33 per cent in low-income economies.
Notably, economies that took on more reform and liberalization commitments as part of their WTO accession negotiations saw a 1.5 percentage point boost to their annual growth rates and attracted more capital investment.
Too many economies and people still left behind
However, the report notes that the income convergence has been uneven, leaving some economies behind. The economies of many poor countries, particularly in Africa, Latin America, the Caribbean, and the Middle East grew slower than the average high-income economy in per capita terms.
“Three-quarters of these economies have trade participation levels below the average for their income group. The remaining quarter, despite having relatively high trade participation, is predominantly specialized in commodity exports. Consequently, the report identifies low trade participation and high commodity dependence as critical trade-related risk factors for economic divergence,” explained Ralph Ossa, WTO’s Chief Economist.
Ossa observed that high trade costs are a major reason for the low trade participation observed in some of these economies. The issue partly stems from trade policies, including high compliance costs associated with foreign standards and incomplete implementation of trade facilitation measures. Additionally, domestic factors, such as underdeveloped physical infrastructure and inefficient infrastructure services play a significant role in hindering trade.
Additionally, the report notes that despite the slight decline witnessed within-country income inequality over the last 30 years, the numbers remain high in absolute terms.
“It is thus understandable that discussions about trade and inclusiveness are often framed as debates about trade and income inequality. However, as we have established, trade integration is not strongly correlated with income inequality; it increases income inequality in some economies while reducing it in others. A more helpful approach is to examine how fairly the gains from trade are shared,” Ossa said.
Protectionism not a solution
According to the report, protectionism is not an effective path to inclusiveness. It has dire consequences including raising production costs and inviting costly retaliation from disgruntled trading partners.
“A more promising path towards a global economy that works for everyone lies in what we at the WTO have been calling “re-globalization” – bringing more economies and communities from the margins to the mainstream of the global economy by helping them attract more trade-oriented investment,” said Dr. Okonjo-Iweala.
“Fast-growing trade in digitally delivered services and environmental goods offer
exciting opportunities, with digital trade in particular lowering the bar for enabling underrepresented economies, small businesses and women entrepreneurs to connect to international markets.”
The report emphasizes the need for a comprehensive strategy that integrates open trade with supportive domestic policies to make trade more inclusive such as vocational training, unemployment benefits, education for a more skilled and mobile workforce, competition policy to ensure consumers benefit from lower prices, reliable infrastructure, and well-functioning financial markets.
Additionally, reducing trade costs, bridging the digital divide, and updating the WTO rulebook to reflect the growing importance of trade in services, digital, and green sectors are essential.
Greater international trade cooperation is also necessary to address evolving challenges in areas crucial to the future of trade. Better coordination among international organizations could help to leverage synergies between trade policies and complementary policies and reinforce their impact on inclusiveness across and within economies.
