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CDP Background Paper No. 45

ST/ESA/2018/CDP/45 Rev.1

December 2018

International trade or technology? Who

is left behind and what to do about it*

Ann Harrison**

* is paper replaces a previous version entitled “International Trade: Who is left behind and what to do about it”.

** Member of the Committee for Development Policy (CDP); University of California, Berkeley Haas; research

associate at the National Bureau of Economic Research (NBER). All errors remain those of the author.

Department of Economic & Social Affairs

ABSTRACT

We examine globalization’s effects on those left behind in both industrial and emerging mar-

kets. While access to global markets has lifted billions out of poverty in emerging markets, the

benefits have not been equally shared. Increased competition through globalization as well as

skill-biased technical change has hurt less educated workers in rich and poor countries. While

much of the rising inequality is often attributed to globalization alone, a brief review of the

literature suggests that labor-saving technology has likely played an even more important role.

The backlash has focused on the negative consequences of globalization in developed countries,

and now threatens the global trading system and access to that system for emerging markets.

We conclude by proposing some solutions to compensate losers from the twin forces of techni-

cal change and globalization.

Keywords: trade, “leaving no one behind”, globalization, inequality

JEL Classification: F02, F16, D63

CONTENTS

1 Countries left behind by globalization ....................................................................... 3

2 Individuals left behind by globalization in emerging markets ................................................ 9

3 Individuals left behind in industrial countries: disentangling globalization and technology ................... 9

4 The Consequences: political polarization and stagnation in growth of world trade ........................... 12

5 Implications for Policy: Trade, Technology and LNOB ........................................................13

Bibliography ............................................................................................... 18

CDP Background Papers are available at https://www.

un.org/development/desa/dpad/cdp-background-pa-

pers/. The views and opinions expressed herein are

those of the author and do not necessarily reflect those

of the United Nations Secretariat. The designations

and terminology employed may not conform to United

Nations practice and do not imply the expression of any

opinion whatsoever on the part of the Organization.

UNITED NATIONS

Committee for Development Policy

UN Secretariat, 405 East 42nd Street

New York, N.Y. 10017, USA

e-mail: [email protected]

http://cdp.un.org

INTERNATIONALTRADEORTECHNOLOGY?WHOISLEFTBEHINDANDWHATTODOABOUTIT

3

Internationaltradeortechnology?Whoisleftbehindandwhattodoaboutit

Whatdowemeanby“nooneleftbehind”inthecontextofglobaltrade?Wemeanthatopeninguptotradeshould

bebeneficialforeventheleastfortunate.Sinceourdefinitionofthoseleftbehindfocusesoneveryindividualin

eachnation,wefinditusefultoidentifyindividuals

leftbehindinbothemergingandindustrialcountrymarkets.

Actualevidencelinkingmeasuresofleavingnoonebehind(LNOB)tointernationaltradeistypicallysparse.Forthis

reason,wefocusonlyonfourmeasuresofthoseleftbehind:poverty,inequality,employment,andwages.

Oneimportantlessonforpolicymakersas

aresultofrecentelectionsintheUnitedStatesandEuropeisthatifthe

forcesofglobalizationandtechnicalchangedonothelpthe“leftbehinds”inrichcountriesthentheywillrespond

but cuttingoff opportunitiesfor emerging markets.To preserveopportunitiesto engage in tradefor emerging

markets,

weneedtoaddresswhatcanbedoneforthoseleftbehindinincreasinglyprotectionistrichcountries.

Webeginbyreviewingglobalization’seffectsonthoseleftbehindinbothindustrialandemergingmarkets.Access

toglobal marketshas  lifted billionsout of poverty in emerging markets,but the benefitsha ve

not been equally

shared.Whiletheprimaryfocusofthisreviewisontrade,technologicalchangehasalsodisadvantagedindividuals

withweakereducationandskills.Risinginequalityisoftenattributedtoglobalizationalone,yetabriefreviewof

theliteraturesuggeststhattechnologyhaslikelyplayedanevenmoreimportantrole.

Thebacklashhasnarrowly

focused on globalization, and now threatens the global trading system and acc ess to that system for emerging

markets.Wediscussproposedglobalandnationalsolutionstocompensatethoseleftbehindbythetwinforcesof

technologyandglobalization.

1. Countriesleftbehindbyglobalization 

Thepressuresofglobalizationontheleftbehindaffectbothdevelopingcountriesdisproportionatelyaswellasthe

leastequippedindividualswithinallcountries.Ibeginwith adiscussionofthepoorestcountriesandtradethen

moveontoadiscussionofindividualshurtbytradewithindevelopingcountries.

Oneofthe

bestaccounts  ofthechallengesposedbyglobalizationforcountriesleftbehindisPaulCollier’s2007

book,TheBottomBillion.Collieridentifiedthecountriesintheworldeconomywhichwerethemostmarginalized,

lowgrowthcountries.Thesecountries,manyoftheminAfrica,sufferfromamultitudeofproblems,includingcivil

war,

anaturalresourcecurse,smallsizeandlandlockedgeography,aswellaspoorgovernanceandcorruption.In

chapter6ofhisbook,hearguesthatthebottombillionhas“missedtheboat”forbenefittingfromglobalization.

Duringthe1980sand1990salargenumberofemergingmarketsbegantoexhibit

highandsustainedgrowthrates,

inpartthroughintegrationintotheglobaleconomy.Highgrowthinturnwasaccompaniedbyadeclineinpoverty

rates.Manyofthese  economieswereinAsia,includingChina,SouthKorea,Taiwan,Singapore,andHongKong,

andmorerecentlyVietnam,Malaysia,andIndonesia.

Collierbelievesthat

thesuccessofrisingAsianowmakesitextremelydifficultforthebottombilliontosucceedvia

aglobalizationstrategy.Hisreasonsaretwo‐fold.First,hearguesthatemergingAsiabenefitedfromagglomeration

economieswhichallowedittocutcostsasitexpanded.Thesuccessfulcountriesaretypicallylarge

inpopulation,

andthemoretheygrew,themoretheywereabletocapitalizeonagglomerationgainsinglobaltrade.Theprimarily

smallcountriesthatmakeupthebottombillionaregoingtohaveaveryhardtimeachievingthesizeandscalethat

wouldallowthemtomovedowntheir

costcurves.Theagglomerationargumentisreinforc edbyasecondtrend:

therisingdemandbygrowingcountriesformorenaturalresources,whichareoftensourcedfromcountriesinthe

bottom billion.Increasing demand for scarce natural resources in low income emerging markets is a boon to

commoditymarketsinthe

shortrun,butinthelongertermhelpstotraptheminaviciouscycleofnaturalresource

specialization,lackofexportdiversification,highervolatilityandultimatelyunsustainablegrowth.

4

CDPBACKGROUNDPAPERNO.45

Collier’sargumentin2006wasthattheforcesofagglomerationcombinedwiththeincreasingdemandfornatural

resourcesmadeitdifficultforthebottombilliontoreplicatetheAsianmiracle.Hearguedthatpartofthetrade 

policy solution was to given least developed countries preferential access and protect them against

 their Asian

competitors.Tenyearslater,theforcesofagglomerationandevengreaternaturalresourcescarcitywouldimply

thattheproblemsfacedbycountriesleftbehindareevenmorechallengingthantheywerebefore.LauraTyson

andSusanLund,writingintheApril2018issueofForeignAffairs,arguethattoday

thereisanevengreaterdigital

dividebetweenthoseleftbehindandothernations,whichexacerbatestheproblemsidentifiedbyCollier.Lund

and Tyson (2018) believe that old sources of comparative advantage based on cheap labor are less and less

important,replacedbyadvantagesduetotelecommunicationsandconnectivity.

My

2007book,Globalizationandpoverty,exploredtheconsequencesofincreasingglobalizationfortheincidence

ofpovertyandinequality.Ifocusedontwomeasuresofglobalization:tradeandinternationalcapitalflows.The

book was a rebuttal tothe simple idea that global economicinte grationshouldhelp the globalpoorsince poor

countrieshave

acomparativeadvantageinproducinggoodsthatuseunskilledlabor.Thebookhasfivekeylessons.

First,suchasimpleinterpretationofgeneralequilibriumtrademodelswasmisleading.Second,thepooraremore

likelytoshareinthegainsfromglobalizationwhentherearecomplementarypoliciesinplace.Third,tradeand



foreign investment reforms have produced benefits for the poor in exporting sectors and sectors that receive

foreigninvestment.Fourth,financialcrisesareverycostlytothepoor.Weconcludedthatglobalizationproduces

bothwinnersandlosersamongthepoor.Thefactthatsomepoorindividualsweremadeworseoffby

tradeor

financialintegrationmeantthatsocialprotectionwascritical.Thesefivelessonsarediscussedinmoredetailbelow.

Thepoorincountrieswithanabundanceofunskilledlabordonotalwaysgainfromtradereform.Manyeconomists

haveusedtheHeckscher‐Ohlin(HO)frameworkininternationaltradetoarguethattradeliberalizationshouldraise

theincomesoftheunskilledinlabor‐abundantcountries.Mostresearchers

whousethisframeworktoarguethat

globalizationisgoodfortheworld’spoormakeanumberofheroicassumptions.Theseassumptions—suchasthe

necessitythatallcountriesproduceallgoods—arechallengedinmybook.In addition,thecountrystudiesshow

that labor is not nearly as mobile as the HO

 trade model assumes; for comparative advantage to increase the

incomesoftheunskilled,theyneedtobeabletomoveoutofcontractingsectorsandintoexpandingones.Another

reason why the poor may not gain from trade reforms is that developing countries have historically protected

sectorsthatuseunskilled

labor,suchastextilesandapparel.Thispatternofprotection,whileatoddswithsimple

interpretationsofHOmodels,makessenseifstandardassumptions(suchasfactorpriceequalization)arerelaxed.

Tradereformsmay resultinlessprotectionforunskilledworkers,whoaremostlikelytobepoor.Finally,accessing

global

marketseveninsectorsthattraditionallyuseunskilledlaborrequiresmoreskillsthanthepoorindeveloping

countriestypicallypossess.

TheoriginalHOmodelassumesthattherearenotechnologydifferencesacrosscountries.ViolationofHOmodels

throughdifferences in technological progresscould explain whylowskill workerssuffer  from

tradeeverywhere.

Letustakeasimpleexample,aspositedbyWilliamEasterly(2007)inhischapterformybook.Easterlycontrasts

theneoclassicalviewbasedonfactorendowmentdifferenceswithwhathereferstoastheproductivitydifferences

view.Ifproductivitydifferences areminimalbutendowmentsdiffer,thenglobalizationshould

leadtothekindsof

reductionsininequalitythatHOpredicts.However,ifthereareexogenousdifferencesinproductivity—withthe

richest countries exhibiting the highest productivity—then opening up to trade will exacerbate inequality.

AccordingtoEasterly,thisisbecauseglobalcapitalisattractedtothehighestproductivitycountries,whichin

turn

willexacerbateinequalitydifferencesacrosscountries.Intheempiricalcomponentofhischapter,Easterlyfinds

thatincreasingtradeintegrationisassociatedwithfallinginequalityindevelopedeconomiesbutrisinginequality

indevelopingcountries.

ThereareotherlikelyviolationsoftheHOassumptionswhichimplythattheoutcomesofglobalizationfor

thepoor

arenotatallclear.ThemostfamoustheoremassociatedwiththeHOmodelistheStolper‐Samuelsontheorem,

whichstatesthatopeninguptotradewillincreasethereturntoacountry’sabundantfactorandreducethereturn

INTERNATIONALTRADEORTECHNOLOGY?WHOISLEFTBEHINDANDWHATTODOABOUTIT

5

to its scarce factor.Assuming that developing countries have more  unskilled labor, economists such as Anne

Krueger used the theorem to argue that globalization should increase the return to unskilled labor and reduce

inequality.Recentevidencemakesclearthisviewwasnotquiteright.DavisandMishraintheirchapterfor

my

book,entitled“StolperSamuelsonisDead”,arguethat

ItistimetodeclareStolper‐Samuelsondead.Atheorem,ofcourse,isimmortal.Itisalogicalrelationthat

existedbeforetherewerehumansandwillsurvivethem,justassurelyasthetheoremofPythagoras.And

theStolper‐Samuelsontheoremhasthehallmarksofgreateconomictheory:anissueofgreatsubstantive

importance,elegantanalytics,andsurprisingresults.Yetanenormousproblemariseswhenwetrytoapply

the Stolper‐Samuelson theorem, unthinkingly, specifically to the question of the consequences of trade

liberalizationforthepoorestorleastskilledinpoorcountries.Inthiscontext,Stolper‐Samuelsonhasbecome

acentralreferencepoint,indeedamantra,atotem:“Stolper‐Samuelsonsaysthattradeliberalizationwill

raisetherealincomeoftheabundant(unskilled)laborinpoorcountries.”Stolper‐Samuelson,quatheorem,

isnotwrong,ofcourse.Butifweuseit,aswesooftenhave,asifitprovidesareliableanswertothisquestion

ofrealhumansignificance,thenitisworsethanwrong—itisdangerous.

Intheirchapter,DavisandMishra(2007)pointtoanumberofreasonswhytradeliberalizationneednotraisethe

realincomeofunskilledworkersinpoorcountries.First,

manygoodsthataretradedarenotevensubstitutesfor

domesticallyproducedgoods.Inotherwords,USconsumersmaynotbebuyingthecornproducedinMexicoby

thepoorestfarmers.Anotherproblemisthatwhatreallymattersis“local”ratherthan“global”factorabundance.

Mexicanexporterslikelycompetemorewith

BrazilianexportersthanwithUSexporters.RelativetotheBrazilians,

Mexicomaynolongerbeabundantinunskilledlabor,andconsequentlywithtradeitishighlypossibleforunskilled

individualstobemadeworseoffbytrade.Anothershortcomingofthemodel,accordingtoDavisandMishra,is

thatit

ignorestheroleforintermediateswhicharelikelytoraisethereturntoskilledratherthanunskilledlabor.

HavingmadethepointthattherearemanyreasonswhyStolperSamuelsondoesnotalwaysholdintherealworld,

whatarethekeytake‐awaysforpolicy?Davis(1996)andFeenstraand

Hanson(1996)emphasizethatacountry

couldbegloballylabor‐abundantbutlocallylabor‐scarce—inotherwords,MexicoisreallycompetingwithChina,

nottheUnitedStates.Thisideaof“local”endowmentsmatteringisacriticalone—andcanservetoexplainwhy

inequalitycouldincreaseinboththeUSand

Mexicosimultaneously.Itisalsolikelythatbarrierstolabormobility

withinregionsofthesamecountrymakeitdifficultforthepooresttotakeadvantageofnewtradingopportunities,

as shown by Topalova (2007) for India.What this means is that even if some parts of a country are rapidly



industrializing(suchasthecoastsinChina),otherlessaccessibleregionsarelikelytosuff er.Thepolicyimplications

aretwo‐fold.First,policyneedstoconcentrateonhelpingworkersfinditeasiertorelocatetowherejobsarebeing

created.Second,policymakersworriedaboutdislocationduetotradeshould

shelveasimple‐mindedapproachto

HOandmeasurecomparativeadvantageintermsofthe“relevant”competitorsag ainstwhomtheircountry’sgoods

areactualsubstitutes.

Thoseleftbehindaremorelikelytoshareinthegainsfromglobalizationwhentherearecomplementarypoliciesin

place.Thebook’scasestudiesonIndiaandColombiasuggestedthatglobalizationismorelikelytobenefitthose 

left behind if trade reforms are implemented

 in conjunction with reducing impediments to labor mobility.In

Zambia, poor farmers only benefited from greater access to export markets if they also had access to credit,

technicalknow‐how, and othercomplementaryinputs.The studiesalso pointto the importance ofsocialsafety

nets.InMexico,ifpoorcorn

farmershadnotreceivedincomesupportfromthegovernment,theirrealincomes

wouldhavebeenhalvedduringthe1990s.In Ethiopia,if foodaidhadnotbeennotwelltargeted,globalization

wouldhavehadlittleimpactonthepoor.Thefactthatotherpoliciesareneededtoensurethatthebenefits

of

tradeare sharedacross the population suggeststhatrelyingon tradereformsalone tohelpthoseleftbehindis

likelytobedisappointing.

These illustrationsofthe criticalrole forcomplementarypoliciesimply that reformsbundling such policieswith

tradeintegration should bea toppriorityfor policy makers.

Inthe short run, the mostcriticalcomplementary

6

CDPBACKGROUNDPAPERNO.45

policieswouldbeuniversa lsocialsupportpoliciescombinedwithtargetedprogramstopromotelaborrelocation

andtrainingforaffectedworkers.Overthelongerterm,keycomplementarypoliciesincludeinvestmentsinhuman

capital, infrastructure provisio n, promoting credit and technical assistance to farmers, and policies to promote

macroeconomicstability.

Exportgrowthandincomingforeigninvestmenthavehelpedallincomelevels.Povertyhas

falleninregionswhere 

exports or foreign investment is growing.In Mexico, the poor in the most globalized regions weathered 

macroeconomiccrisesbetterthantheirmoreisolatedneighbors.InIndia,openinguptoforeigninvestmentwas

associatedwithadeclineinpoverty.ThestudyonZambiasuggeststhatpoorconsumers

gainfromfallingprices

forthegoodstheybuy,whilepoorproducersinexportingsectorsbenefitfromtradereformthroughhigherprices

fortheirgoods.InColombia,increasingexportactivitywasassociatedwithanincre aseincompliancewithlabor

legislationandafallinpoverty.InPoland,unskilledworkers— who arethe

mostlikelyto  bepoor—gainedfrom

Poland’saccessiontotheEuropeanUnion.

Financialcrisesarecostlytothepoor.InIndonesia,povertyratesincreasedbyatleast50percentafterthecurrency 

crisisin1997.WhilerecoveryinIndonesiawasrapid,the Mexicaneconomytookdecadestofullyrecoverfromits

1995pesocrisis.Povertyrates

inMex icointheyear2000werehigherthantheyhadbeentenyearsearlier.Cross‐

countryevidencealsosuggeststhatfinancialglobalizationleadstohigherconsumptionandoutputvolatilityinlow‐

incomecountries.Oneimplicationisthatlowincomecountriesaremorelikelytobenefitfromfinancialintegration

if

theyalsocreatereliableinstitutionsandpursuemacroeconomicstabilizationpolicies(includingtheuseofflexible

exchangerateregimes).However,foreigninvestmentflowshaveverydifferenteffectsfromothertypesofcapital

flows.Whileunrestrictedcapitalflowsareassociatedwithahigherlikelihoodofpoverty,foreigndirectinvestment

inflowsareassociatedwith

areductioninpoverty.Thepoverty‐reducingeffectsofFDIareclearlydocumentedin

thebook’scasestudiesonIndiaandMexico.

Globalizationproducesbothwinnersandlosersamongthepoor.Itshould not be surprising that globalization’s

impactdefieseasy generalization.Even within a single region,twosets offarmers may be affected inopposite

ways.In

Mexico,whilesomesmallandmostmediumcornfarmerssawtheirincomesfallbyhalfinthe1990s,large

cornfarmersgained.Acrossdifferentcountries,poorwageearnersinexportingsectorsorinsectorswithincoming

foreigninvestmentgainedfromtrade andinvestmentreforms;conversely,povertyratesincreasedinpreviously

protected

sectorswhichwereexposedtoimportcompetition.Withinthesamecountryoreventhesameregion,a

trade reform may lead to income losses for rural agricultural producers and income gains for rural or urban

consumersofthosesamegoods.

Thelimitedtimeseriesforpovertydatafromhouseholdsurveys

makesitalm ostimpossibletoconcludeanything

ontheaggregaterelationshipbetweenopennessandpoverty.Inaco‐authoredpaperwithEmmaAisbettandAlex

Zwane (2005), I measured the linkages between openness, GDP growth, and poverty.We measured openness

using both the ratiooftrade(X+M) to GDPand average

 tariffs.We found that greater openness—using either

measure‐‐isassociatedwithrisingaggregateincome.



Aisbett,HarrisonandZwane(2005)thenmeasuretheassociationbetweenopenness,GDPgrowth,andpoverty.



1SeeAisbett,Harrison,andZwane(2005)formoredetails.Toaddressconcernsregardingendogeneity,opennessismeasured

eitherusingitsthreeyearlagorthecontemporaneousvalueinstrumentedusinglaggedvalues.Theseresultsarerobusttothe

inclusionofothercontrols,suchascountryfixedeffectsorpolicyvariableslikelyto

becorrelatedwithtradepolicies.Other

extensions, using growth of GDP per capita as the dependent variable instead of income per capita, yield similar results.

Although some specifications—notably those that include country fixed effects and instrument for openness using lagged

values—are not always significant at the 5 percent level, the

evidence is generally consistent with a positive relationship

betweenopennessandincomeorgrowth.TheevidenceisalsoconsistentwithrecentworkbyLee,Ricci,andRigobon(2004)

whoapplymoreinnovativewaystoaddresstheendogeneityofopennessandcontinuetofindapositiverelationshipbetween

openness(measuredusingtrade

shares)andgrowth.

INTERNATIONALTRADEORTECHNOLOGY?WHOISLEFTBEHINDANDWHATTODOABOUTIT

7

PovertymeasuresweretakenfromhouseholdsamplesurveysmadeavailablebytheWorldBank.Whiletheresults

arerobusttothepovertymeasurechosen,povertywasdefinedasthepercentageofhouseholdslivingonlessthan

$1adayinPPPterms.Theevidencesuggeststhatgrowthisassociatedwith

afallinpoverty.Thiskeyresulthas

been confirmed by many other studies (see, for example Besley and Burgess (2003)).Regardless of income

measuresorspecifications(OLSversusIV)incomegrowthisassociatedwithareductioninthepercentageofthe

populationthatispoor.



Althoughthisevidencesuggestsa stronglinkfrom tradeintegrationtoaggregateincome,andan evenstronger

association between inco me growth and poverty reduction, there is no strong link between globalization and

povertyoutcomes(seeAisbett,HarrisonandZwane(2005)).Thecoefficientsonbothtradesharesandtariffsare

insignificant

in OLS or IV regressions that seek to find a causal link from globalization to different measures of

poverty(suchaspovertyincidenceorheadcountmeasures).Tosummarize,thereisnoevidenceintheaggregate

datathattradereformsaregoodorbadforthepoor.

Howisitpossiblethatgrowthandopennesstotradeareso

strongly correlated, and the poverty‐reducing effects of growth are indisputable, yet direct linkages from

globalizationtopovertyreductionareevidentlyweak?Onelikelyexplanationisthattradeisindeedan“engineof

growth”,butthatinmany

casesthepoorestindividualsdonotparticipatedirectlyintrade‐relatedactivities.Even

incountrieswithacomparativeadvantageinproducingunskilled‐intensivegoods,succeeding onglobalmarkets

requires a highly skilled workforce and the ability to market and distribute goods in an increasingly competitive

climate.We will show evidence later

 in this essay thatin the United States exportactivities disproportionately

benefitthemoreeducated component ofthelaborforceandimportactivitiesaremorelikelytoharmunskilled

workerwages.The componentof growththat canbe tracedtoincreasingglobalactivity(whetheritis tradeor

foreigninvestment)

isnotaspro ‐poorasothersources—suchasinnovationsthatincreaseagric u lturalproductivity.

Oneimportantimplicationisthatevenifcross‐countrystudiespointtoapositiverelationshipbetweenglobalization

andoverallgrowth,suchgrowthislikelytoleadtounequalgainsacrossdifferentlevelsofincome.Ifthegrowth



effects on average are small and there are large distribu tional consequences, trade‐induced growth could be

accompaniedbyadeclineinincomesofthepoor.Oneimportantpolicyimplicationisthatfocusingprimarilyonthe

growthconsequencesofglobalizationwillnotensurethatthemostmarginalizedgroupsbenefit.Increasedtrade

needstobeaccompaniedbyincreasedsocialprotectionforthoseleftbehind.

Whileitisimpossibletodojusticeinthisessaytothevolumeofotherresearchthataddressestradeandpoverty

linkages, it is worth highlighting some key studies.Winters (2002, 2004) was one of the first to lay

 out a

comprehensive framework for understanding the impact of trade reforms on poverty through the different

channels of consumption, enterprises, and government revenues.Winters correctly points out that from a

theoreticalperspectivetheanswersarefarfromclear.In someregions,openinguptotradewilllowertheprices

of

goodsconsumedbythepoor,inother regions,tradecouldwipeoutthesourcesoflivelihoodforsubsistence

farmers.Similarly, while convertingquotas to tariffs in thecontext oftrade reformcould  increase government

revenuesavailableforpr o‐poorprograms,reducingtariffscouldeasilyhavetheoppositeeffect.Wintersalsopoints





The coefficientsonreal GDPper capitaare much largerthanthosereported by BesleyandBurgess (2003).Thepoverty‐

reducingeffectsofgrowtharelargerbecauseanyoneofthefollowingchangesaloneleadstobigchangesinthecoefficienton

GDPper capita: theinclusion oftimeeffects,

alargersample withmoreyears ofdata andmore countries, theinclusion of

otherpolicydeterminantsofpoverty,oraPPPrealGDPpercapitameasure.Thefactthatanyofthesemodificationsleadsto

suchlargechangesinthecoefficientonGDPpercapitasuggeststhat—despiteastrongpoverty

‐reducingeffectofgrowth—

theexactmagnitudeoftheeffectcannotbepreciselyestimated.

 In a comparable exercise using country‐level poverty headcounts and trade shares, Ravallion (2004) reaches a similar

conclusion;hearguesthatthereisnorobustrelationshipbetweenpovertyandglobalizationintheaggregatedata.Possibly

theonlyexceptiontothese general conclusions is Agenor(2004), whofindsthat thereis

anonlinearrelationshipbetween

measuresofpovertyandglobalization.Agenorfindsthatatlowlevels,globalizationappearstohurtthepoor,butbeyonda

certainthreshold,itseemstoreducepoverty.Forearlierrelatedstudies,seeDollarandKraay(2001,2002).

8

CDPBACKGROUNDPAPERNO.45

tomanyofthe shortcomingsinherentinthe elegantmodels ofeconomists.Forexample,mostmodelsassume 

somevariantofperfectcompetitionorzeroprofitsoverthelongterm.However,ifdistributionchannelsorlocal

marketsarecontrolledbydomesticmonopolists,manyoftheexpectedbenefitsofglobalizationforthepoor

and

non‐poormaynotmaterialize.

Inthe last decade, studies on globalizat ion and countryoutcomeshavecontinuedto proliferate.Inlight of the

hundredsofstudies,itisdifficulttodojusticetoallofthem,soIwillonlymentionselectedstudiesinthisessay.

Thelatestpapers

intheareaofglobalizationusestructuralmodelstocastlightonthelinkagesbetweenopening

uptotradeandcountrywelfare.Onesuchstudy,byAdao,Costinot,andDonaldson(2017)estimateshowworld

welfarewouldhavebeenaffectedifChinahadnotbecomeintegratedintotheworldeconomysince1995.

Using

amixedCESspecificationandcomputablegeneralequilibriumtechniques,theyshowthatthefallinChina’strade

costswereestimatedtobearound20percentbetween1997and2005.Theyestimatethatthisfallintradecosts

resultedinwelfaregainsforChinaofbetween1and1.5percent

inGDPpercapitaperyear.Theythenestimatea

positive impact on welfare for the rest of the world and show that rich countries generally gained more than

emergingmarkets.Onlythreeeconomies—Bulgaria,Romania,andIndonesia,appeartoshownetwelfarelosses.

ThedistributionofgainsandlossesfromChina’s

integrationintotheworldeconomyisshownbelow.Twoissues

areimportanttonote.First,theseeffects—despitetheenormousincreaseinChina’sshareinglobaltrade—are

notlarge.Second,theseeffectsdonottakeintoaccountdistributionaldifferencesacrossincomegroupswithinan

economy,whichwediscussinmoredetail

below.



DistributionofgainsandlossesfromChina’sintegrationintotheworldeconomy



Source:Adao,Rodrigo,ArnaudCostinot,andDaveDonaldson."Nonparametriccounterfactualpredictionsinneoclassical

modelsofinternationaltrade."AmericanEconomicReview107.3(2017):633‐89.

 

INTERNATIONALTRADEORTECHNOLOGY?WHOISLEFTBEHINDANDWHATTODOABOUTIT

9

2. Individualsleftbehindbyglobalizationinemergingmarkets

My2007bookindicatedthatglobalizationsystematicallypromotesindividualemploym entandearningsinexport

intensivesectorsandregionswhichreceivemoreforeigndirectinvestment.However,inregionsandsectorsfacing

intensifiedimportcompetition,inequalityandpovertyoftenrise,whilewagesfall.Theseweretheresultsfound

by Topalova for India (2007),

 for example.More recent surveys (see Pavcnik (forthcoming)) also find that in

emergingmarketstherearebothwinnersandlosersfromglobalization.Pavcnik(forthcoming)identifiesthoseleft

behindasindividualsworkinginlessproductiveenterprises,inimport‐competingsectors,andwithlesseducation.

Sincethesewerealreadyindividualsatthe

bottomoftheearningsdistribution,globalizationhasconsequentlybeen

associatedwithanincreaseininequalityincountrieslikeColombia,whichshestudiedinthewake oftheirtrade

reforms.When workers cannot easily move from shrinking sectors to expanding sectors, the negative

consequencesoftradereformarelarger.Pavcnikalsoreports

somepositiveexampleshowever:inVietnam,the

growth of exports led to a shrinking of the informal sectors as the formal sector expanded, resulting in better

employmentconditionsandhigherpay.

Anumberofrecentstudiesmeasuretheunequaleffectsoftradeontheconsumerside.Oneoftheearliest

papers

to do so was Porto (2006).Porto explored how Argentina’s trade reform differentially affected consumers

dependingontheirexpendituresandth edesignofthetradereform.FajgelbaumandKhandelwal(2016)inaQJE 

paperentitled“TheUnequalEffectsofTrade”measurethedifferencesintheeffectsoftradeformany

countries.

Focusingexclusivelyontheconsumptionside,theyshowthatopeninguptotradeistypicallypro‐poorbecausethe

poor tend to consume a greater share of traded goods and these goods typically have a lower elasticity of

substitution across  source countries.Their counterfactuals suggest that moving from current

trade shares to

autarkywoulddisproportionatelyhurtpoorerconsumers.Itisimportanttoemphasizethatthisapproachdoesnot

addressthesupplyside.Ifthepoorweretobemoreadverselyaffectedinemploymentopportunitiesandwages,

theseeffectswouldcountertheirgainsontheconsumptionside.

BorusyakandJaravel(2018)

addressexactlythisissue,usingdatafortheUnitedStates.Whiletheydonotexamine

theconsequencesforpovertyintheleastdevelopedcountries,theirresultsareinstructive.Theyfindthatwhile 

thegainsfromtradearepro‐poorontheexpenditureside—asfoundbyFajgelbaumandKhandelwal(2016)—these

effects

aredwarfedbytheeffectsontheearningsside.FortheUS,thenegativeimpact oftrade on earningsis

significantlylargerforlessskilledworkers,whichmorethanoffsetsthegainsontheconsumptionside.

Pacvnik(forthcoming)emphasizestheimportanceoflocallabormarketsindeterminingtheimpactoftrade.

After

Mexico joined NAFTA, wage earners in the north of Mexico wheremost exporters were based benefited while

employees in regionsfar fromthe US didnot.InIndia after the1991 reforms, districts facing the highesttariff

declines as a function of pre‐existing production patternsexhibitedthe slowest

improvementsin poverty rates.

Oneimportantimplicationisthatthereissignificantlackofworkermobilityacrossregionswithincountries.This

meansthatindividualsalreadylocatedinareasthatfacemoreimportcompetition,havefewerskills,receiveless

capital investment, and host the least productive firms are likely to be both

 harder hit and to find difficulty in

relocatingtowinningregions.RecentworkonBrazilsuggeststhattheseunequaleffectsaremagnifiedovertime,

withlosersfromglobalizationgettingworseoff20yearsafterareform,whilewinnerscontinuetogain.

3. Individualsleftbehindinindustrialcountries:disentanglingglo balizationand technology 

Akeygroup ofvotersintheUnitedStates,France(inthepresidentialelections),andGreatBritain(illustratedby

theBrexitvote)associatesglobalcompetitionwithdeclinesintheirwelfare.Aseparatequestioniswhetherinfact

greaterinternationalcompetitionhasledtoworselabormarketoutcomes.Isthepainreal,or

isimportcompetition

justavisibleandconvenientscapegoat?Inthelastsixyears,manynewstudieshaveappearedre‐evaluatingthe

10

CDPBACKGROUNDPAPERNO.45

linkagesbetweentradeandworker‐leveloutcomes.ManyofthesestudiesuseChina’sentryintotheWTOin2001

asakindofnaturalexperimenttoevaluatetheimpactofglobalizationonwages,employment,andothermeasures

oflaborforcewell‐being.

Even before the recentevents inNAFTA countries and

 Europe,economists had begun toquestionwhether the

textbookmodels(HO,Ricardo)oftradeadjustmentwhereworkersmovecostlesslyfromcontractingtoexpanding

sectors.Theabilityofworkerstobeabletoshiftfromlessproductiveintomoreproductivefirmsandsectorsis

criticalforthe newtradeliterature that

emphasizes firmheter ogeneity.Modelsthatallowforheterogeneityin

firmproductivityincludethepioneeringworkbyMelitz(2003)andfollowuppapersbyMelitzandOttaviano(2008)

andMelitzandTrefler(201 2).TheMelitzframeworkcreatesanewchannelthroughwhichtradeaffectsindustry

productivity:theincreasedcompetitionleadstoa

reallocationofmarketsharetowardsthemostproductivefirms,

andlessproductiveenterprisesshrinkorexitthesector.

Melitz (2003) was inspired by Pavcnik’s (2002) study showing that two thirds of productivity growth in Chil e

occurredthroughreallocationofmarketsharetowardsmoreefficientfirms.Decompositionsforothercountries,

however,

generally show thatmostfirmproductivitygains occurthroughwithinfirmimprovementsratherthan

between firmreallocation.This is particularlytrue forIndia, as shownbyHarrison,Martin,and Nataraj (2014).

Decomposing sources of productivity gains for manufacturing enterprises in China also indicate that most

productivity gains are from within firm

 improvements rather than betweenfirm reallocation (see, for example,

Aghion,Cai,Dewatripont,Du,Harrison).Whilefurtherworkiswarranted,onereasonforthiscouldbethedifficulty

inmovinglaborfromlessproductivetomoreproductiveenterprises.

Trefler (2004) used a heterogeneous firm framework to identify what happened to wages

and employment in

CanadaasaconsequencesoftheUS‐CanadaFreeTrade  Agreements.Theresultsweresobering.Treflerfound

thatwhileenterprisesinCanadaimprovedproductivityperformance,thisimprovedperformancewasassociated

withasignificantdeclineinemployment.Trefleralsofoundthatthereformfavoredbettereducatedworkers,for

whom

wagesincreased.

RecentStudiesMeasuringtheImpactofGlobalizationonWorkers.Since1984,whentherewere25millionjobsin

USmanufacturing,abouthalfhavedisappeared.TheshareofemploymentinmanufacturingfortheUShassteadily

declined from one in four workers to less than 1 out of 10 today.In much of Europe, the story is

the same:

manufacturing employment shares have steadily declined by nearly 2 % a year since the 1980s.

 These were

typicallygoodjobs:Ebenstein,Harrison,McMillanandPhillips(2014)showthatifthesameindividualmovesfrom

manufacturingtoservices,theirwagefallsbyupto20%inrealtermsifthecauseistrade.Thisfallinwagesfor

peoplewhomoveoutofmanufacturingjobs

suggeststhatthereisasignificantpremiumtoremaininginthissector.

IntheUnitedStates,inequalityisatitshighestlevelsincethe1920s.Chart1updatesanearlierchartcreatedby

AnthonyAktinson(2015).Thefigureshowsthelevelofinequalityinmajorindustrialandemergingmarketsusing

standard

GinimeasuresandhouseholddisposableincomecollectedbytheLuxembourgIncomeSt udy(LIS).Chart

1showsthattheUnitedStateshasthehighestlevelofinequalitywithinhighincomecountries.Whileinequalityis

higher in a number of emerging markets like Mexico, in those countries inequality has declined or remained

relatively stable.Rising inequalityinthe United States combinedwith an erosion of high paying manufacturing

employmenthaslikelycontributedtovoterdiscontent.

Did economists, who have long supported free trade, miscalculate the costs of globalization?We made two

mistakes.First,wethoughtthatitwouldbemuch easierfor

peopletoshiftout oftrade‐impactedsectors.Key

resultsfromEbensteinetal(2014)showninChart2makesthispoint.Inthefirstfourcolumns,wemeasurethe

impact of changes in offshoring and trade on individual wages within manufacturing and show that with this

approach there is no

 significant impact of international competition.In the  last four columns, we measure



SeeJeanImbs(2017)inTheFactory‐FreeEconomy,editedbyLionelFontagneandAnnHarrison(2017).

INTERNATIONALTRADEORTECHNOLOGY?WHOISLEFTBEHINDANDWHATTODOABOUTIT

globalizationattheoccupationallevelandshowsignificanteffects.Thisisbecausealotoftheactionisinleaving

manufacturing,whichiscapturedbyoccupationalexposureassomeoccupationsaremoretradeablethanothers.

Chart2alsoshowsuswhatkindofUSworkershavebeenmostaffectedbyinternational

competition.Thewage

impacts of occupational exposure to global competition are significantly higher for workers engaged in routine

tasks.Chart2showsthatroutineworkersaresignificantlyaffectedbybothimports(inanegativeway)aswellas

exports(inapositiveway).Thepointestimatesindicatethata10

percentincre aseinimportcompetitionwould 

leadanindividual’swagestodeclineby3percent,whilea10percentincreaseinexportswouldleadtheirwagesto

increase by nearly 7 percent.All this would be missed in typical research that evaluates the effects of import

competitionwithinmanufacturing,sincemoving

acrossindustriesdoesn’thurtworkersasmuchasbeingforcedto

leavemanufacturing.ThepositiveimpactofUSexportsissomethingIwillgetbacktowhenIdiscusstheliterature

onChinaandlabormarketoutcomes.Notealsothatoffshoringtolow incomecountries hurtsroutineworkers,

whileoffshoring

tohighincomecountries(likeEurope)onlyhasbenigneffects.Onereasonisbecausemuchofthe

foreigninvestmentsbetweenrichcountriesareofthehorizontaltype,wherethemainmotivationismarketaccess

ratherth anseekingcheaperwages.AnotherreasonisbecauseverticalFDI,whichseekstosourcecheaperor

higher

qualityinputs,iscomplementarybetweenrichcountriesbutleadsfirmstosubstitutelowercostworkersforamore

expensivelaborforcewhenflowingfromrichertopoorercountries.Studiesinthe1970s,1980s,andearly1990s

consequentlywouldhavemissedthenegativeimpactofoffshoringbecausemostofit

wastohighincomeregions

likeEurope,insteadoftoMexicoandChinawheremanyfirmsgonow.

The results in Chart 2 also show that non‐routine workers, which typically include individuals  with a college

educationandthoseperformingmorecomplextasks,arenotaffectedby eitheroffshoringortrade.

Thisdifference

inimpactmeansthatglobalizationhasbecomeadivisiveissueacrosstheUSpopulation.

Mostmodelsofinternationaltradesuggestthatthebestoutcomesintermsofwelfarecanbeachievedifweare

ableto“compensatethelosers”.Oursecondmistakeasacademicswastoassumethat

thiswouldbeaneasytask.

Forexample,theUnitedStatescomprehensivetradeadjustmentprogram,knownasTAA,hasnotbeensubjected

toalotofevaluat ion.Yetpreliminaryevidencesuggeststhathalfofthosewhocouldhavebenefiteddidn’tuseit.

Therehavebeensurprisinglylimitedeffortstounderstandwhether

thosewhodidapplyforTAAaremadebetter

offrelativetoothercomparableindividuals.Preliminaryevidence,conducted byBen Hyman,suggeststhatTAA 

canbeeffectiveingettingworkerstogobacktowork(2017).Ifso,thenfindingwaystoincreasetake‐upabove

fiftypercentofeligible

workerscoulddoalottoalleviatethepainforlosersfromglobalization.

BlamingChinaChina accounts fornearly25 percentofnon‐oil importsinthe United States.

There are nowa

number of highly influential papers evaluating whether Chinese exports can account for the decline of US

manufacturingemployment.TheseincludeworkbyDavidAutor,DavidDorn,andGordonHansonshowinglocal

labormarketeffectsofChinesecompetition,andPeterSchottandJustinPierce’sworkonChina’s

joiningtheWTO.

Autor, Dorn, and Hanson (2013) suggest that China’s rise accounts for around 25 percent of the decline in

manufacturingemploymentintheUnitedStates.

TheseresultshavebeenquestionedbyRobertFeenstrainaseriesofpapersandalsobyShangJinWeiinanew

paperfocusing

onverticallinkages.Feenstra,Ma,andXu(2017a)arguethattheoriginalresultsinAutor,Dornand

Hanson(ADH)areover‐stated.Theyshowthattakingintoaccountlocaldemandshocksandincludinglocalhousing

pricesleadstheADHresulttolosesignificanceforaggregateemployment.Asecondpaperby

Feenstra,MaandXu

(2017b)makesthepointthatlookingonlyatChineseexportsislikeevaluatingtrafficinone direction.Theyshow

thatthenegativeemploymenteffectsofChineseimportsonaggregateemploymentarecompletelyoffsetbythe



SeethepresentationbyRobertFeenstra,June28,2017,“The‘ChinaShock’inTradeReconsidered”,TheGroningenGrowth

andDevelopmentCentre25

AnniversaryConference.

12

CDPBACKGROUNDPAPERNO.45

positiveeffectsofUSexports.WealreadysawthisinChart2,whereexportgrowthwouldcompletelyoffsetthe

negativeeffectsonwagesofimportcompetition.

ShangJinWeimakesadifferentpoint.HeshowsthatifwetakeintoaccountthebenefitsfromChineseimports

thatareinputsintoother

sectors,wecanagainoffsetthenegativeemploymenteffectsfoundbyAutor,Dorn,and

Hanson.Yet another paper by Robert Feenstra (Amiti, Dai, Feenstra and Romalis (2017)) shows that China’s

entranceintotheWTOaccountsfora1%reductionintheUSpriceindexeachyearbetween2000and

2006.

To summarize, there is clearly a  segment of industrial country wage earners who are being left behind by the

increaseinglobalcompetition.Thesearetheindividualswithlesseducationwhoarealreadyfrustratedbyhigh

levelsofinequalityandwhoarenotbeingreachedbyprogramsliketheTAA.

YetHarrisonandMcMillan(2011)

and Fontagne and Harrison (2017) make the case that import competition is a small  problem compared to the

onslaughtofautomation.Forexamp le,manufacturingemploymentasashareoftotalemploymentintheUnited

Stateshassteadilydeclinedsincethe1960s,butChinadidnot

beginthetr ansitiontoamoreopeneconomyuntil

1978.

Something else besides Asian competition is needed to explain the steady decline in industrial country

manufacturingemploymentshares.Theevidencepointstoacombinationofstructuralchangeandtechnological

progress.

HarrisonandMargaretMcMillan(2011)exploredthedeterminantsoflabordemandforUSmultinationals.They

showedthatfirmsmovingfactories

offshorecanaccountforabout10percentofthemanufacturingemployment

decline.Most of it—12 out of the 17 percentage point decline in labor demand between 1982 and 1999—is

becausecheapercapitalequipmentisreplacingpeople.InFontagneandHarrison(2017),JeanImbsdocuments

the structural shift in OECD countries away

 from manufacturing employment.Imbs shows that manufacturing

employmentintheUSAandrestofOECDhasbeenfallingsincethe1970s.ButmanufacturingasashareofGDP 

hasbeensteady.IntheUS,forexample,manufacturingasashareofGDPinconstanttermshasremainedat12%

forthelast50years,whileemploymentshareshavesteadilydeclined.Thisistrueformostoftheindustrialworld:

fallingmanufacturingemploymenthasbeenaccompaniedbyasteadymanufacturingVAshareinGDP.Howcan

thatbe?Becauseproductivityisrising.



4. TheConsequences:politicalpolarizationandstagnationin growthofworldtrade.

DonaldTrumpwontheUSpresidentialelectionbyconvincingvotersinkeyswingstateslikeMichigan,Ohio,and

Pennsylvaniathathewould“makeAmericagreatagain”.Trumppromisedtoimpose20percenttariffsonimports,

buildawalltokeepoutMexicanimmigrants,andrenegotiateNAFTA. Inthe2016firstround

ofvotingintheFrench

presidential elections,Marine LePengenerated  strongsupport on afar rightplatformthat included leavingthe

EuropeanUnion.TheUnitedKingdomactuallytooktheplunge,withthemajorityvotingforBrexitinJune2016.

These separateevents suggest a returnto protectionism.Chart3

shows that afterfour decades of risingtrade

shares,globalintegrationhasstalled.Since2010,tradeshareshavedeclinedforallcountryincomelevels.Another

strikingfactisthatlowincomecountries,whichhadthehighestshareoftradeinGDPin1960,haveexhibitedthe

slowestgainsinglobalization.The

shareoftradeinGDPforthisgrouphasadvanced verylittlecomparedtoother

incomelevelsoverhalfacentury.Theslowdowninglobalintegrationisalsoevidentinthesteadyincreaseinthe

numberoftraderestrictivemeasuresadoptedatthecountrylevel,asmonitoredbytheWorld

TradeOrganization,

theWTO(Chart4).



ForanoverviewofChina’stradeandindustrialpolicies,seemychapter“TradeandIndustrialPolicy:Chinainthe1990sto

Today”,inTheOxfordCompaniontotheEconomicsofChina,2014,OxfordUniversityPress.

INTERNATIONALTRADEORTECHNOLOGY?WHOISLEFTBEHINDANDWHATTODOABOUTIT

Whatiscausingthisslowdown?Newstudiesshowthatexposuretoglobalcompetitionfromlowincomecountries

isassociatedwithashifttowardspopulistoutcomes.TwostudiesofFranceandGermanyfoundthatregionsmore

exposed to trade with low wage countriesincreasedthevote sharesgoingto extreme right par ties.

Votes for

Brexit were more stronglyassociated with local exposure to trade with China.

Gordon Hanson and colleagues

analyzedvotingpatternswithintheUSbetween2002and2010andshowedthatincreasedexposuretotradewith

Chinawasassociatedwithashifttowardsbothextremerightandextremeleftcandidates.



WhilenotthefocusofmostpolicydebatesintheUnitedStates,amoreopenUnitedStatespost‐WWIIcontributed

toadeclineinglobalinequality.Chart5showsthatglobalinequalityhasdeclinedascountriesinthemiddleofthe

globalincomedistributionhavegrownthefastest.Thekind

ofgloballeadershipthatwasprovidedbytheUnited

States and Europe post‐World War II to openinternationalmarkets providedopportunitiesto grow and reduce

poverty.PovertyratesinChinaandIndiahavefallenbymorethanhalf.Chart5,createdbyBrankoMilanovic,is 

knownastheelephantgraph

duetoitsshape.WithoutChina,thiscurvelooksprettyflat.Oneimportantquestion

articulated by Paul Krugman in conversation with the author is whether continued growth of middle income

emerging markets ispossible withouthurtingroutineworkersin richcountries.Ireviewedtheevidenceabove

suggestingmixedevidenceon

whetherChina’sentryintotheWTOin2001 wasassociatedwithfallingemployment

andwagesinindustrialcountriescompetingwithChinesegoods.Doesthisimplythatweneedtochoosebetween

promotingglobalequalityandwithincountryequality?

DaniRodrikasksthisquestionexplicitlyinarecent2017workingpaperentitled,

“IsGlobalEqualitytheEnemyof

NationalEquality?”

Heargues thatthe seemingtrade‐offisno longerrelevantin2017.Thisisbecausemany

would‐be industrializers have either de‐industrialized or missed the opportunity to move into large scale

manufacturing.Astechnologyleadslabor‐intensivemanufacturingtousemorerobotsandChinahasbeguntode‐

industrialize,theopportunitiesforemergingmarketsaremorelimited.Forthisreasonandothers,Rodrikargues 

thatmigrationprovidesmoreopportunitiesforreducingglobalinequalitygoingforward.



5. Implicationsfor P o licy:Trade,Te chn ologyand LNOB

The acc umulated evidence suggests that globalization and technology have left behind not only the poorest

countries,butalsothepoorestindividualswithinbothindustrialandindustrializingcountries.Thefactthatleast

developed country exports account for only 1.1 percent of global trade suggests that there is much scope for

improvement.Populist

rightwingmovementsincountriesthathavebeenpro‐tradefordecadesalsomeanthat

thepro‐globalizationagendaisatgreaterrisktodaythananytimesincethe193 0s.Whatcanbedonetoleaveno

onebehind?

InternationalSolutions.Advocatingprotectionismisunlikelytoyield beneficialsolutions.Many studies

(seethe

comprehensive review in Harrison and Rodriguez‐Clare (2004)) report that trade and growth have been highly

correlatedovertime,regardlessofthedifficultchallengesinassigningacausallinkfromtradeopennesstolong

run growth.Trade can be an important avenue for growth in both emerging and

industrial country markets.

Consequently,one critical policychallengeishowtomaintainopenmarketsforbothcountriesandsegmentsof

thosepopulationsthatarebeingleftbehind.



SeeMalgouyres(2014)andDippel,Gold,andHeblich(2015).

SeeColantoneandStanig(2016),NBERWorkingPaper21812.

Theyalsoanalyzedthevotesinthe2016presidentialelectionandfoundarobustpositiveeffectofrisingimportcompetition

onRepublicanvotesharegains.Inacounterfactualexercise,theyshowthatifChineseimportpenetrationhadbeen50percent

lowerthenHillaryClintonwouldhavebeenelectedinsteadof

DonaldTrump.

AccessedonDaniRodrik’swebsite.

14

CDPBACKGROUNDPAPERNO.45

Practicallyspeaking,policysolutionsforglobaltradeshouldbereformulatedwiththegoalofleavingnoonebehind.

Sincetheoverarchingprincipleinallpost‐warnegotiationshasbeenreciprocity,itisclearthatLNOBhasnotbeen 

a big priority.Re‐orienting negotiating principles would imply prioritizing openness to goods

 from LDCs and

prioritizingopennesstogoodsfromsectorsthatemployvulnerablegroups.Forexample,ensuringthatindustrial

countrieskeepmarketsopenforgarmentsandapparel,aswellasagriculturalproductsproducedbylowerincome

households, is one strategy.Limiting protectionist measures in industrial countries—such as anti‐dumping and

countervailing

measures—whichfallonLDCSaswellasvulnerablepopulationsinexportingcountries wouldalso

behelpful.SincetheGATT andnowitssuccessortheWTOoperatesonthebasisofreciprocity,thiswouldmean

upendingtheframeworkforthecountriesandpopulationsthatareleftbehind.

PaulCollierinhisbook

onthebottombillionproposedcreating aconcessionalarmattheWTO.JustastheWorld

Bankhasaseparategrantfacilitytosupportthepoorestcountries,whichisindependentofitsloanoperations,the

WTOshouldbemandatedtonegotiatemarketaccessforthegoodsofleastdevelopedcountries

andvulnerable

populations.OneongoingweaknesswiththeWTOisthatthestrongestnegotiatingteams—comingfromtheleast

vulnerablecountries—willtypicallycomeoutontop.FurthereffortstosupportWTOdelegatesfromLDCsarealso

needed.Oneideawouldbetocreateamentorshipprogram,linkingeachdelegatefromanLDC

toadelegatefrom

astrongercountry.Aone‐on‐onementorshipprogramcouldnotonlyenhancethenegotiatingteamsfortheleft

behindsbutcouldalsoprovideanopportunityforthoseleftbehindtobetterarticulatetheirchallengestoother

WTOmembers.Thecostwouldalsobelowerthan

otherprogramsthathavebeenproposedorimplemented.

Tradepreferencesweredevelopedexplicitlytoaddresstheneedforspecialtreatmentforcountriesleftbehind.

Trade preferences, however, face a number of problems.Trade preferences typically involve special access by

developingorlessdevelopedcountriestoindustrialcountrytrademarketsormore

advanceddevelopingcountries.

ArrangementsthatconfertradepreferencesincludetheGeneralizedSystemofPreferences(ortheGSP),theAGOA,

andmost recentlyduty‐freetariff‐free(DFTF)acc ess forleastdevelopedcountries.Thesepreferencestypicallygive

poorercountriesaccesstoaprotectedmarket,anddependingonthecircumstancescanlead

toatransferofthe

tarifforquotarentsthatwouldhaveaccruedtotheprotectedmarkettothepoorcountryexporter.Inthatsense,

theyactlikeavoluntaryexportrestraintthattransfersrentstotheexportingcountry.

Today, most WTO developed country members grant either full or nearly full

 DFQF (duty‐free and qu ota‐free) 

marketaccesstoLDC products.Also,a  numberofkeydevelopingcountry partners(like Indiaand Chile)granta

significantdegreeofDFQFmarketaccesstoLDCproducts.

Theevidenceontheactualgainsaccruingtobeneficiariesofthesedifferentpreferenceschemeshasbeen

mixed.

Thereasonsarevaried.First,itappearsthatmanyLDCswhocouldtakeadvantageoftradepreferencesfailtodo

so,possiblybecausetheadministrativecostsarehighorthesepotentialbeneficiariesdonotexportthegoodswhich

havebeengrantedpreferences.Second,thevalueofthepreferencesareoft en

small,andhavebeenfalling(known

as“preferenceerosion”)asaveragetariffsgloballyhavefallenandquotaconstraintshavebeenlifted.Thisimplies

thatpreferentialtreatmentmakesincreasinglylittledifference.Howcanpreferenceerosioncanbereconciledwith

thesmallshareoftheleastdevelopedcountriesinworldtrade?

Onereasonisbecausepreferenceerosionhas

been concentrated in goods that are generally globally traded and not in so‐called “sensitive” sectors such as

agriculture,areaswheretheleastdevelopedcountriesarguablyhaveanadvantage.Preferenceshaveoftenbeen

deniedorrestrictedforgoodswhichleastdevelopedcountriescouldexport

butwhichareconsideredsensitivein

thehostcountry—suchasagriculturalcommodities(i.e.,sugar,rice)ortextilesandapparel.Secondly,preference

erosionisconsistentwithongoingbarrierstoLDCgoodsinthesensethatmanyofthebarriersarenotexplicitbut

implicitsuchashealthandsafetyrequirements.One

factorthathasalsocontributedtopreferenceerosionisthe

proliferation of regional trading agreements, whose members often enjoy duty and quota free access to each

other’sgoods.

Expanding the importance of trade preferences for LDCs would consequently involve (1) lowering their

administrativecosts(2) includingLDCs asmuchaspossible

as partners inthe preferentialtradingarrangements

INTERNATIONALTRADEORTECHNOLOGY?WHOISLEFTBEHINDANDWHATTODOABOUTIT

that contribute to preference erosion and (3) expanding preferences for goods which LDCs export such as

agriculturalcommoditiesandapparel.

Solutions with global and national components.  Global solutions should focus on building effective trade

preferences for LDCs and other countries in need.Below, we also discuss the importance of complementary

policiestoensurethatthebenefits

oftradearemoreequallyshared.Inbetweenthesetwoimportantpolicyareas

existsa thirddimensionwhichweonlybrieflymentionhere:theneedtodesigntradeagreementsinawaythat

preservesenoughpolicyspaceforcountriestodefineindustrialandsocialpolicies.Thistopichasbeensubject

of

animportantdebateinlastyears(particularlyduringthemoreactivephasesoftheDohaRound),andisdiscussed

ingreatdetailbyDaniRodrik,JoeStiglitz,andothers.

Forexample,explicitsubsidiesforexportpromotion,domesticcontentlaws,andinfantindustryprotectionisnow

explicitlyrestrictedorprohibitedby

theWTO.Yetmanyindustrialcountriesandsuccessfulemergingmarketssuch

asSouthKoreaandTaiwanemployedtheseinstrumentstocatchupwithindustrialcountries.China’sapproachto

this dilemma following its accession to the WTO has been to eliminate the most egregious examples of these

policies but to quietly

continue to employ quite a few of them.The evidence in Aghion et al (2015) suggest

widespreaduseoftaxholidaysandsubsidiesinChina.Evenifdomesticcontentrulesdonotexplicitlyexist,there

issignificant pressureto createlocal capabilitiesfor entering multinationalsacross different components of the

value

‐chain.Othercountriesseetheseindustrialpolicyactivitiesassuccessfulandwouldliketoemulatethem.

National solutions. The second important change that needs  to be made is systematic and widespread

compensationforthosele ftbehindbyglobalizationinbothrichandpoorcountries.Thelateststudiesshowthat

globalizationhas

imposedrealandprolongedpainfordislocatedworkersinbothindustrialandemergingmarkets.

Withoutasubstant ialincreaseinsocialprotection,s upportfortheglobaltradingsystemwillcontinuetoerode.

Recentthinkingonhowtoensurethatnooneisleftbehindemphasizestheimportanceofuniversalmechanisms

of redistribution,

 such as universal access to social services or the strengthening of universal social protection.

ThesearethefirstbestsolutionsadvocatedbyinternationalorganizationssuchastheUnitedNationsandtheILO.

The United Nations(2016) report“Leaving no onebehind: the imperative ofinclusive development”makes the

followingpoints

(pages121‐122):

“Policyapproachestoaddressexclusionandleavenoonebehindhaveoftenbeencenteredonthepromotion

oftherightsandcapabilitiesofdisadvantagedsocialgroups.Thereisnonethelessgrowingrecognitionthat

action to promote social inclusion must go beyond group‐specific approaches…that would address the

underlyingsocial,economicandpoliticalcausesofinequalityandsocialinjustice….Theuniversalprovision

of social protection as well as good‐quality health and education services can address a range of

exclusionarybarriers.Accesstogood‐qualityeducationinparticularempowersindividualseconomicallyby

enhancingtheirhumancapital,butitalsoentitlesthemsociallyandpolitically….”



TheUnitedNationsandILOcallforuniversalprovisionofserv icesinhealthcareandeducation,aswellassocial

protection for all of society.The UN has advocated for a Social Protection Floor which is nationally defined,

reflecting

 country‐leveldifferencesin administrativecapabilities, fiscal space,needs and priorities.Examples of 

suchprogramsincludetheEuropeanUnion’s“Europe2020”strategyandRwanda’svision2020.Effectivesolutions

tosupportindividualsleftbehindbyglobalizationarelikelytoincludeuniversalaccesstohigherqualityandlower

cost public education at

all levels as well as training programs like those in Germany.While the question of

affordability has been posed, estimates by the ILO and others suggest that a universal social protection floor

(excludinghealthcarebutincludingold‐age,disabilityandfamilyallowances)isfeasibleevenforleastdevelopmen t

countries.Of

course,suc hprograms wouldbeenhancedbymeasuresthatstrengthen fiscalspaceandimprove

domesticresourcemobilizationthroughtaxandtransferreforms.

16

CDPBACKGROUNDPAPERNO.45

Even when universal social programs are effective, such approaches are likely to require special measures.

Combattingrisinginsecuritywithmoreeffectivesafetynetsshouldalsobeexplored,suchasaTradeAdjustment

Assistanceprogramthatcoversallaffectedworkers.IntheUS,TradeAdjustmentAssistance(TAA)wasdesigned

toprovidea

safetynetforindividualshurtbytrade,butmanywhoqualifydonotapply.Increasingtake‐upsothat

themajorityofworkerswhoqualifyactuallyuseitshouldbeatoppriority.Whileagreatlyexpandedsafetynetmay

seemexantetobeacostlypolicysolution,I

suspectthatthecostsaresmallrelativetothelostopportunitiesfrom

amoreprotectionistworld.

Onerecurrentthemethroughoutthisessayisthatmuchofthedislocationthatisperceivedtobeassociatedwith

globalizationislikelyassociatedevenmorewithtechnologicalchange.Whatshouldpolicydoifthemain

reason

forariseininequalitiesisactuallynottrade,butrathertechnology?Thisisadifficultquestion,butaveryimportant

one.TheUnitedNationsconductedanonlinesurvey in2016ofscientistsandexpertsaroundtheworld,  asking

themaboutcrucialemergingtechnologiesthatcouldaffectth eSDG

agenda,bothintermsofopportunitiesaswell

asthreats.Theonlinesurvey resultsare instructivefor tworeasons.First,thescientistsidentifiedanumberof

technologydevelopmentslikelytoadverselyaffecttheleftbehind.Theseincludedthe“digital‐tech”spacethat

includesbigdatatechnology,3‐Dmanufacturing,cloudcomputing,

digitalmonitoringandotherareas.Otherareas

identified were nano‐technology, neuro‐technology (robots, artificial intelligence, driverless cars, drones) , and

greentechnology.Foralltheseareas,whilescientistsidentifiedareasofpotentialforhelpingthoseleftbehind,

theyalsoidentifiedanumberofpossibleadverseeffects,includingunequalbenefits,

joblosses,polarization,new

inequalities,deskilling,wideningtechnologygaps,andpoorpeoplepricedout.

WhatwasmostremarkableabouttheUNstudyisthatthevolumeissilentonsolutionstotheseproblems.While

dislocationduetotradeoverthedecadeshasresultedintargetedprogramsthataddresssomeofthe

concerns, 

the large disruptions in the labor force due to the next wave of new technologies have not yet been seriously

addressed.Someinnovativeproposalshavebeensuggestedbyindividualsacrossthepoliticalspectrum.Anthony

AtkinsonandBillGatesbothsuggestedevaluat ingnewtechnologyforitsabilitytocreatejobs

insteadofeliminate

them.Anthony Atkinson proposed supporting technology which is labor‐using and taxing technologies which

eliminatejob s.Suchaproposalishighlycontroversialandopposedbyorthodoxlaboreconomists,whofeelthat

such an approach would discourage innovation and productivity growth.Our discussion above regarding the 

importanceofuniversal

socialprotectionfloorstakesonanewurgencyinlightofthepotentiallylargejoblosses

arisingfromnewtechnology.

Can we better identify the complementarities between measures of globalization and other policies? It is

increasinglyevidentthatthepooraremorelikelytogainfromopennesstotradeif

thereareothercomplementary

policiesinplace.Anumberofrecentstudiesemphasizetheimportance ofcomplementarypoliciesindetermining

thebenefitsorcostsoftradereformsfordevelopingcountries.Forexample,FreundandBolaky(2005)showthat

tradereformsactuallyleadtoincomelossesinhighlyregulatedeconomies.

However,much

moreworkisneededtoidentifywhichtypesofpoliciesshouldaccompanytradereforms.There

hasbeenlittleanalysistoshow,forexample,thatfinancialglobalizationwouldbebeneficialtodevelopingcountries

ifitwasaccompaniedbyflexibleexchangerateregimesorbetterinstitutions.Additionalworkisneededtoidentify

whethertradereformsintroducedinconjunctionwithlabormarketreformsaremorelikelytoreducepoverty,and

how to properly design social safety nets to accompany trade reforms.While Mexico has been successful in

targetingsomeofthepoorestwhowerehurtbyref orms,theseprogramsareexpensiveandadditionalresearch



couldidentifywhetherthisapproachisrealisticfortheverypoorestcountries.

Furtherresearchisneededtoidentifythesourceoftheimmobilityoflabor.WhilestudiesonIndiaandColombia

showthatsomeofthesesourcesareartificial—stemmingfromlabormarketlegislationwhichinhibitshiringand

firing—Goh and Javorcik

argue that much of the immobility of labor in Poland is due to societal factors which

discourageworkersfromrelocating.Furtherevidence,identifyingtherelationshipbetweengrosslaborinflowsand

outflowsandtradereformswouldbeusefulinthisregard.Themostrecentevidenceonthepainfulcostsoftrade

INTERNATIONALTRADEORTECHNOLOGY?WHOISLEFTBEHINDANDWHATTODOABOUTIT

reformfor thoseleft behindin Brazil,forexample, showthatamajorunderlyingproblemisthe lackof mobility

acrossdifferentlocallabormarkets.Theissueisthesameinindustrialcountries.Theimmobilityofth eleastskilled

workersintheUnitedStatesmeansthatwhenlocallabormarketsare

negativelyaffectedbytrade,thoseworkers

either are unwilling or unable to move.New evidence consistent with this suggests that in the USA, trade

adjustmentassistanceisconsequentlymosteffectivewherelocallabormarketsareresilient.

While the need for labor mobility is emphasized here, does this mean that protection

to workers should be

scrapped?Clearlytheanswerisno.Althoughworkersneedto beabletomovefrom contractingtoexpanding

sectors,dropping measuresthat providerightsforworkersdoesnotseem tobetheanswer either.Workersin

manydevelopingcountriesstilldonotbenefitfrombasichealthand

safetyregulations,andtherighttoorganizeis

frequentlynotrecognizedbygovernments.Inmanycountries,workersseekingtoformunionsarefiredorjailed,

orevenworse.Strikingtherightbalancebetweensafeguardingworkerrightsandensuringlabormobilityinorder

tocreatenewjobsisdifficult,butnecessary.

 



18

CDPBACKGROUNDPAPERNO.45

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ofChina,editedbyShenggenFan,RaviKanbur,Shang‐JinWeiandXiaoboZhang,2014.

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20

CDPBACKGROUNDPAPERNO.45

Winters,L.Alan."Tradeliberalisationandpoverty:whatarethelinks?."WorldEconomy25.9(2002):1339‐1367.

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

INTERNATIONALTRADEORTECHNOLOGY?WHOISLEFTBEHINDANDWHATTODOABOUTIT

Chart1:InternationalComparisonsofWithinCountryInequalityin2013.TheChartshowsthattheUnitedStateshas

thehighestlevelofine qua lity (asmeasuredbytheGiniCoefficient)withinhighincomecou ntries.



Note: This graph shows the Gini coefficient for equivalent household disposable income in different countries

rankedin

decreasingorder.ThecoefficientinSwedenwas23.7percent.

Sources: LIS Key Figures http://www.lisdatacenter.org/data‐access/key‐figures/download‐key‐figures/,

downloaded9June2017.Thedataarefor2013exceptforAustralia(2010),Canada(2010),China(2005),France

(2010),India(2011),Ireland(2010),Israel(2012),Japan(2008),Korea(2012),Mexico(2012),SouthAfrica(2012),

Sweden(2005).





0 10203040506070

Sweden

Norway

Denmark

CzechR

Netherlands

Austria

France

Germany

Ireland

Switzerland

Japan

Korea,Rep

Poland

Canada

Italy

Australia

Greece

Spain

Israel

Brazil

Mexico

India

Colombia

China

SouthAfrica

GiniCoefficientPercent

GiniCoefficientsinDifferentCountriesin2013

22

CDPBACKGROUNDPAPERNO.45

Chart 2: Table 2 from Ebenstein, Harrison, McMillan and Phillips  (2014) showing that wage impacts of different

measuresofglobalizationaresignificantlyhigherforworkersengagedinroutinetasks.



Source:“EstimatingtheImpactofTradeandOffshoringonAmericanWorkersUsingtheCurrentPopulationSurveys”,

AvrahamEbenstein,AnnHarriso n,

MargaretMcMillanandShannonPhillips,TheReviewofEconomicsandStatistics,

October2014.





INTERNATIONALTRADEORTECHNOLOGY?WHOISLEFTBEHINDANDWHATTODOABOUTIT

Chart3:SlowdowninGrowthofGlobalTradeSincetheFinancialCrisis.



Source:GraphcompiledbytheauthorbasedonWorldBankOpenDataRepository.Eachlineshowstheaverage

share of trade (exports plus imports) in GDP for the per iod 1960 through 2016 by country income category

accordingtotheWorldBankclassifications.





MerchandiseTradeShareinGDP,1960to2016

Highincomecountries Uppermiddleincomecountries Middleincomecountries

Lowermiddleincomecountries Lowincomecountries

24

CDPBACKGROUNDPAPERNO.45

Chart4:TradeRestrictivemeasuresalsorisingovertime.



Source:WorldTradeStatisticalReview,WTO,2016,Chart7.1





2009 2010 2011 2012 2013 2014 2015 mid-Oct 14

to mid-May

mid-Oct 15

to mid-May

Trade-restrictive Measures, Excluding Trade Remedies

(average per month)

INTERNATIONALTRADEORTECHNOLOGY?WHOISLEFTBEHINDANDWHATTODOABOUTIT

Chart5:BrankoMilanovic’selephantdiagramshowingthereductioninglobal inequality.Globalinequality,which 

measuresinequa lity betwe encountries,hasdeclinedbecauseofthecatch‐upofmiddle‐incomeemergingmarkets

(primarilyChina).



Source:CourtesyofBrankoMilanovic,fromLaknerandMilanovic(2016).

