As cross-border free trade in goods and services is a vital tool of globalisation, the opponents of globalisation usually blame free trade for income inequality or socio-economic disparity in the world. To what extent globalisation, expansion of international trade to be more precise, is responsible for the persistent income disparity across the countries is, however, a matter of close scrutiny. Proponents of globalisation have been arguing for a long time that free trade has played little role in widening inequality. A number of studies and literatures have also been published so far to establish the argument with data and evidences. The World Trade Report 2024, published by the World Trade Organization (WTO) last week, is the latest addition in this connection, providing key insights into the relationship between global trade and income inequality.
Before entering into the core findings of the WTO report, a quick understanding of globalisation and its relationship with trade will be helpful. Last month, the Peterson Institute for International Economics released an updated version of its feature 'What Is Globalisation? And How Has the Global Economy Shaped the United States?' discussing various aspects of globalisation and its role in the advancement of the US economy. Originally published in 2018, the feature mentioned: "Globalisation describes the growing interdependence of the world's economies, cultures, and populations, brought about by cross-border trade in goods and services, technology, and flows of investment, people, and information."
The article also pointed out that globalisation is often measured by the value of total trade relative to gross domestic product (GDP) or total economic output. "By this measure, globalisation has gone through five distinct eras since 1870, rising during the latter half of the 20th century to its peak right before the global financial crisis of 2008-10, and slowing since then, amid major trade conflicts between the United States and China, and the COVID-19 pandemic," it added. Thus, the world is now in the era of 'globalisation' - a phenomenon which involves a slowing down of the pace of global integration. Before globalisation, the world witnessed almost three decades of liberalisation from 1980-to 2008. In 1981, the ratio of international trade in goods and services in terms of world GDP was 39 per cent, which reached a peak of 61 per cent in 2008. In 2023, the ratio stood at 59 per cent of the global GDP, according to the estimation provided by the Peterson Institute.
In other words, there has been a gradual expansion of trade over the last four decades, despite a slowdown in the last one and a half decades. In this context, the latest trade report of the WTO showed that the expansion of trade has contributed to enhancing overall incomes and reducing poverty without necessarily increasing inequality. The report, however, mentioned that, on average, income inequality has slightly declined over the past 30 years, but it remains high in absolute terms, and some large economies face rising inequality. The answer to the role trade plays is: "Trade may increase or decrease inequality within an economy, but its overall impact on inequality tends to be small. The slight fall in inequality over the past 30 years coincided with a substantial increase in trade." The WTO publication added that trade openness and inequality are weakly and negatively correlated. This means that trade does not necessarily increase disparities and does not contribute significantly to reducing inequality, though the role of trade in poverty reduction cannot be ruled out. The quantification of the role is also not an easy thing, but the potential benefits of global trade are significant.
The latest version of the world trade report pointed out that though most people gain from trade, some suffer losses, especially if they are exposed to distortions and barriers that limit their adjustment or access to foreign markets. Again, many gains from trade depend on redistribution within economies, from relatively less to more productive firms, sectors or regions, and the distribution of the gains from trade among workers is unequal, according to the report.
Earlier, the above-mentioned analytical piece of the Peterson Institute analysis showed that globalisation has 'helped narrow inequality between the poorest and richest people in the world', with the number of people living in extreme poverty reduced by half since 1990. Nevertheless, in many countries, including the US, inequality is on the rise. The reason is the exposure of the countries to globalisation that have 'alleviated inequality to different degrees through tax and welfare systems.' In other words, some countries do not mobilise government policies sufficiently to reduce inequality.
Returning to the WTO Trade Report 2024, it makes a clear assertion that the benefits of trade are not evenly distributed, a situation that is not solely due to trade policies, but often to domestic policies as well. The report's key conclusion is that while reducing trade would also reduce prospects of growth and inclusiveness, relying solely on trade and trade policy would not fully seize these opportunities. The report emphasizes the crucial role of domestic policies in shaping the impact of global trade, underlining the need for comprehensive solutions to make the gains from trade more inclusive.
An opinion piece titled 'The complex interplay between inequality and attitudes about globalisation' is included in the report. Written by Stefanie Walter, a professor at the University of Zurich, the piece briefly explains why people think that free trade, as well as globalisation, is responsible for inequality. He concluded that instead of directly shaping the views and the debate about globalisation, the "effects of inequality on people's perceptions of globalisation are conditioned by the economic, societal and political context in which they play out." The conclusion is significant in understanding the depth of trade's role in reducing or enhancing inequality.
© 2024 - All Rights with The Financial Express
