EXECUTIVE SUMMARY EXECUTIVE SUMMARY TRADE IN A GLOBALIZING WORLD International trade is integral to the process of episodes of globalization. The most recent period globalization. Over many years, governments in most of globalization starting in the immediate post- countries have increasingly opened their economies to World War II period, strongly bolstered by new international trade, whether through the multilateral communications and transport technologies, has trading system, increased regional cooperation or been marked by a prolonged period of strong trade as part of domestic reform programmes. Trade and and economic growth. globalization more generally have brought enormous benefits to many countries and citizens. Trade has TRENDS IN GLOBALIZATION allowed nations to benefit from specialization and economies to produce at a more efficient scale. It Globalization has caused significant structural changes has raised productivity, supported the spread of in parts of the world economy. knowledge and new technologies, and enriched the range of choices available to consumers. But deeper Some countries and economic sectors have been able integration into the world economy has not always to take advantage of these structural changes better proved popular, nor have the benefits of trade and than others. In the first decades after World War globalization necessarily reached all sections of society. II, Europe and Japan were important beneficiaries Trade scepticism is on the rise in certain quarters, and of globalization as they sought to restructure their the purpose of this year’s core topic of the World Trade economies. In more recent years, newly industrializing Report, entitled “Trade in a Globalizing World”, is to economies have been among the major winners from remind ourselves of what we know about the gains increasing economic integration. from international trade and the challenges arising from higher levels of integration. A long-term shift in the composition of world merchandise trade has occurred, with the share of The Report explores a range of interlinking manufactured goods rising dramatically, against questions, starting with a consideration of what a decline in agricultural products and non-fuel constitutes globalization, what drives it, the benefits minerals. The domination of developed countries it brings, the challenges it poses and what role in world exports of manufactures has been greatly trade plays in this world of ever-growing inter- diluted, first in labour-intensive goods (such as dependency. We ask why some countries have textiles and clothing) and subsequently in electronic managed to take advantage of falling trade costs and products and capital-intensive goods (such as greater policy-driven trading opportunities while automotive products). others have remained largely outside international commercial relations. We also consider who the Global trade growth was less dynamic after the oil winners and losers are from trade in society and crisis of 1973, while migration and foreign direct what complementary action policy-makers need investment (FDI) flows accelerated, especially from to take in order to secure the benefits of trade for the mid-1980s onwards. Migration differed between society at large. In examining these complex and the two globalization periods referred to above, multi-faceted questions, the Report reviews both the as many earlier sources of emigration (especially theoretical trade literature and empirical evidence Western Europe) became destination points. South that can help to give answers to these questions. to North migration flows increased in importance, while South-South flows continued. GLOBALIZATION AND TRADE Capital flows have always played a prominent role The key economic features of globalization constitute in the globalization process. In the last few decades deeper integration in product, capital and labour liberalization and deregulation have contributed markets. strongly to a surge in FDI flows. But regions have been affected differently, with important consequences Globalization is not a new phenomenon. Since for the development of technological know-how and the mid-19th century, there have been at least two the geographical pattern of industrialization. xiii WORLD TRADE REPORT 2008 MAIN DRIVERS OF GLOBALIZATION Allowing workers to move across national borders can alleviate skill shortages in receiving countries or The main forces driving global integration have respond to the needs in rapidly ageing societies while been technological innovation, political change and alleviating unemployment or under-employment in economic policy choices. countries providing these workers. Chief among the technological drivers of International surveys of public attitudes towards globalization are inventions that have improved the globalization suggest that a majority of people speed of transportation and communications and recognize these benefits. But this recognition is lowered their costs. These include the development accompanied by anxieties about the challenges that of the jet engine, containerization in international come with globalization. While large majorities shipping, and the revolution in information and believe that international trade benefits their communications technology. Equally notable are countries, they also fear the disruptions and changes in production methods which have created downsides of participating in the global economy. new tradable products, expanded global production Seemingly, stronger support exists for trade in some in food and made manufacturing more efficient. emerging economies than in industrial countries. Support for globalization appears to be waning in Political developments in the last decades of the the industrialized countries even though it still 20th century sowed the seeds of further economic enjoys the support of a majority of the public. integration. These include China’s economic reforms, the fall of the Berlin Wall and the collapse For policymakers who embrace more open markets, of the Soviet Union. survey results indicating overall support for globalization may be encouraging, but disregard Finally, globalization has benefited from economic for rising public concern about some aspects of policies favouring deregulation and the reduction globalization threatens to undermine the legitimacy or elimination of restrictions on international trade, of governments and imperils social support. The foreign investment and financial transactions. Trade answer to this tension lies in a balance between opening has been pursued multilaterally through open markets and complementary domestic policies, successive multilateral negotiations, bilaterally and along with international initiatives that manage the regionally through preferential trade agreements risks arising from globalization. and unilaterally. In the case of many developing countries, early commercial policies had an inward- THE CAUSES OF TRADE looking focus. But the success of a number of newly industrializing economies in East Asia with export- Economic theory has identified several sources of gains led growth strategies contributed to a more general from trade and thus a number of different causes of adoption of industrialization policies that recognized trade. the importance of exports in the process. Traditional trade theory emphasizes the gains from GLOBALIZATION AND specialization made possible by differences among PUBLIC ATTITUDES countries. The main contribution of this strand of thought is that opportunities for mutually beneficial Globalization has benefited the world economy but trade exist by virtue of specialization on the basis concern has intensified about its potentially disruptive of relative efficiency – a country does not have to and disadvantageous consequences. be better at producing something than its trading partners to benefit from trade (absolute advantage). Global integration in product, capital and labour It is sufficient that it is relatively more efficient than markets has resulted in a more efficient allocation its trading partners (comparative advantage). This of economic resources. Economic integration has insight explains why so many more opportunities to resulted in higher levels of current output and gain from trade exist than would be the case if only prospects of higher future output. Consumers have absolute advantage counted. More recent theories a wider choice of products and services at lower point to other sources of gains from trade not linked prices. Capital can flow to countries which need to differences among countries, such as economies of it the most for economic growth and development. scale in production, enhanced competition, access to a broader variety of goods and improved productivity. xiv EXECUTIVE SUMMARY GAINS FROM SPECIALIZATION Evidence generally confirms that alternative theoretical explanations of the causes of trade, as Traditional trade theory comprises a number of distinct well as the sources of gains from trade, are not but related propositions that are more or less robust mutually exclusive. Patterns of international trade and more or less supported by empirical evidence. typically reflect the interaction of several different factors. However, we have a limited appreciation of The gains-from-trade theorem, which is the central the overall impact of realized comparative advantage proposition of trade theory, states that if a country on an economy’s total income. can trade at any price ratio different from its relative