40 / 54
40
Benefits of Open Trade
Increased trade, through its longer-term impact on
productivity, has been a key contributor to global
growth and prosperity since the Second World War.
Openness to trade brings many benefits to the
supply side of the economy. These include: larger
markets, greater specialization opportunities, and
the increased ability to exploit economies of scale
and scope; faster transmission of technology and
innovation; and greater competitive pressure on
domestic firms to increase their productivity.
Collectively, these forces lead to a more efficient
allocation of a country’s scarce resources—one that is
more closely aligned to its international comparative
advantage.
As a consequence, consumers can benefit from lower
prices, higher real incomes, and greater variety and
quality of goods and services. Increased openness
may also reduce wasteful rent- seeking behavior on
the part of protected industries and the related costs
of corruption.
These benefits from open trade are very evident in
India. Academic research has found substantial
gains for India following its dramatic trade reforms
in the 1990s, which benefited consumers via lower
prices and firms via higher markups. These higher
profit margins spurred innovation and provided
funds for the development of new products.
Looking ahead, the upcoming implementation of the
goods and services tax in India—which will create a
common market internally—is expected to provide
many of the same benefits as trade liberalization
does internationally.
Openness to trade has certainly played a large role
in the economic ascent of Asia. Following the rise of
Japan, Korea, Taiwan and others, fast growth in China
and India has lifted hundreds of millions of people
out of extreme poverty—an unprecedented feat in
human history.
The benefits of economic integration and other
reforms are exemplified in India’s higher growth rate
since the introduction of market reforms in 1991.
Growth has averaged 6.5 percent annually in the
post- reform period, compared to about 4 percent
annually over the prior 40 years. Indeed, India is the
fastest-growing major economy in the world today.
Reflecting these gains, a number of emerging market
countries have been strong supporters of open trade,
a sign of how much the world has changed in recent
years.
A few examples can help to illustrate some of the
benefits of globalization. India’s green revolution—
which helped to greatly increase its agricultural
productivity and food security—was facilitated by
U.S. technology and scientists working with their
Indian counterparts. Similarly, as is well known,
Indian engineers and entrepreneurs have played
a key role in the technology sector’s tremendous
achievements in recent decades and now lead some
of America’s largest companies, including Google and
Microsoft. This success, in turn, has had important
benefits for India as well, including increased foreign
investment flows and employment opportunities
that have helped develop a vibrant information
technology ecosystem.
But, increased openness to trade is not a panacea
in and of itself. Actual benefits depend on a range
of other critical factors, including macroeconomic
policy, the business and regulatory environment, the
legal regime, the quality of infrastructure, and the
quality of public services, including education. While
the gains from a liberalized trade regime are not
guaranteed, the alternative of trying to achieve a high
standard of living by following a policy of economic
isolationism will fail. Trade has played a key role in
nearly all of the high-growth success stories since the
middle of the last century.
Challenges of Open Trade
It is important to recognize that while trade and
international integration tend to increase the overall
economic pie, the distribution of the larger pie may
be very uneven. In fact, slices for individual groups
may shrink. Some workers—particularly those in
industries that are less able to compete and whose
skills have become less relevant—can be hurt and find
it difficult to adjust. This often requires individuals to
change industries and to relocate to different regions.
So, while trade is almost always a win for a country’s
economy, not everyone within that economy will be
a winner. This is especially the case where there are
no policies to cushion the negative consequences of
trade and to facilitate adjustment.
Effects are also country- and industry-specific, and
depend on initial endowments and conditions. Low-