National Council of Applied Economic Research
Opinion: Shekhar Aiyar.
The World Bank’s measure of extreme poverty, at $2.15 a day, represents a level of deprivation that is rarely seen in the West. At this income, hunger or its shadow is an inescapable feature of life. Estimates suggest that over half the children born to poor families are undernourished. One could argue that even a small material improvement for a family living in such dire circumstances adds more to the sum of human welfare than big gains for the more fortunate.
One of humanity’s greatest achievements over the past half century has been its striking progress in reducing poverty. The share of the global population living under the poverty line fell to under 10 percent in 2021 from well over 40 percent in 1981, with much of the reduction coming from just two countries: China and India. The decline was so unexpectedly rapid that a United Nations goal of halving global poverty was achieved five years early. The improvement has also led to a more equitable distribution of global income, with developing countries accounting for a sharply rising share of world G.D.P.
International trade was indispensable to these gains. In the late 1970s and mid-1980s, China and India increasingly opened up their economies to the world. And many other countries prospered by using trade as a ladder of development, including the East Asian “Tigers” earlier in the 20th century.
All this is imperiled now that Western countries are turning increasingly protectionist. On both sides of the Atlantic, and both sides of the aisle in Congress, the idea has gained currency that trade with less affluent countries costs jobs and lowers wages. This kind of zero-sum thinking would sharply curtail development opportunities for countries with living standards far below those in the West.
Through its powerful link to economic growth, international trade has long been a scourge of global poverty. Developing countries that liberalized their trade regimes and integrated with the world economy — call them “globalizers” — have vastly outperformed the non-globalizers over the past four decades. The globalizers have also grown much faster than rich countries, allowing them to gradually reduce the still yawning per capita income gap with the West.
China and India have been among the world’s fastest-growing economies since the 1980s, together lifting an astonishing 1.1 billion people out of absolute poverty. Trade liberalization lay at the heart of both countries’ economic reforms, with the ratio of trade to G.D.P. soaring after liberalization. They reforms included tariff reductions, the elimination of licensing requirements and import monopolies, and greater exchange rate flexibility. Combined with a multitude of domestic policy changes, they unleashed the dynamism of local entrepreneurs. Businesses had much easier access to foreign ideas, capital and markets. At the same time, greater domestic competition, including competition from imports and from newly established subsidiaries of foreign companies, weeded out inefficient businesses and spurred brisk productivity growth.
The blueprint is widespread. The electronics giant Samsung produces more than a third of its mobile phones in Vietnam. Even against the backdrop of rapid growth for the country as a whole, two provinces, Thai Nguyen and Bac Ninh, stand out for achieving particularly steep reductions in poverty. They are the provinces where the phones are manufactured. Similar evidence emerges from Mexico, where municipalities with a greater concentration of workers employed by internationally linked companies experienced larger declines in poverty and improved access to basic goods such as food, health care and education.
Being connected to supply chains helps local businesses prosper. Not only do they get access to cutting-edge technology, they also develop valuable long-term relationships and learn how to navigate international markets. Their demand for inputs and raw materials helps create a vibrant local ecosystem. The World Bank estimates that a 1 percent increase in participation in international supply chains is accompanied by a more than 1 percent increase in per capita income.
Trade also tends to reduce gender-related disparities by creating more jobs for women, often generously compensated by local standards. Export-oriented businesses in developing countries hire more women than companies that produce solely for the domestic market. New jobs in the services export sector are disproportionately staffed by women. Call centers in Delhi and Mumbai alone employ about one million mostly female workers. In Bangladesh, villages with more exposure to the garments export industry — whose work force is overwhelmingly female — saw a significant drop in teenage marriages and pregnancies, and young girls in those villages gained an average of 1.5 additional years of early schooling.
These gains stand at enormous, and needless, risk today. Donald Trump has promised to institute tariffs of 10 percent to 20 percent on almost all imports into the United States and a 60 percent tariff on all Chinese goods. Among Democrats, the anti-trade fervor is more muted, but hardly absent. Far from fully reversing the previous Trump tariffs on steel and aluminum, the Biden administration has recently added to them. And while its signature Inflation Reduction Act has laudable goals, it is laden with requirements penalizing the buying of goods from abroad, even if they are less expensive and better than the domestic equivalent. Around the world, trade restrictions have risen explosively, with the number of protectionist measures imposed in 2022 more than 10 times as large as those imposed a decade earlier.
Higher tariffs designed to protect jobs in affluent countries have been amply documented as simultaneously regressive and futile. They are regressive because low-income households disproportionately consume goods that are traded, such as televisions and groceries, which tariffs make more expensive, while more affluent consumers tend to purchase a higher share of non-tradeable services, such as therapy and restaurant meals. They are futile because the jobs they save, if any, are generally outnumbered by the job losses they cause in other sectors of the economy.
That said, the true price of the backlash against trade will not be paid by rich countries, which are, after all, already rich. The best case for preserving the liberal trade order comes from those countries that are not so fortunate.
The most important, and least discussed, consequence of rising protectionist barriers is that low-income countries will find it more difficult to employ trade as an engine of growth. This would diminish the material prospects of the world’s poorest people and slow the rate at which generations of children can expect to escape the kind of life-stunting deprivation that is no more than a fading memory in the West. If international trade were to shrivel under the assault of populist passions and muddled analysis, that would be unfortunate indeed for rich countries. For the vastly more populous remainder of the world, it would be a tragedy.
Shekhar Aiyar is a visiting scholar at Johns Hopkins School of Advanced International Studies, a nonresident fellow at Bruegel, a think tank, and a visiting professor at India’s National Council of Applied Economic Research. He is currently writing a book titled, “A Defense of the Liberal Economic Order: From a Not-Entirely-Western Perspective.”