Five findings from the latest World Trade Report show how international trade shapes inclusivity

In the last 30 years, the world has experienced an extraordinary reduction in income disparities, with the average income gap between economies narrowing down. This economic growth has enhanced living conditions and opportunities for many individuals globally, although others have fallen behind.

Yet, the ongoing debate about globalization and inclusiveness often hinges on oversimplification. One major misconception suggests that international trade harms inclusiveness by benefiting only wealthy countries and individuals, while neglecting marginalized groups and remote areas, which worsens inequality.

The World Trade Organization (WTO) World Trade Report 2024 explores the complex interlinkages between trade and inclusiveness across and within economies. While trade supports jobs and offers access to more affordable goods and services, some people may struggle to adjust to the changes that come with increased trade. Many low- and middle-income countries also find it hard to diversify or engage fully in global trade.

While most barriers to inclusiveness can be traced back to domestic policies, failure to find effective solutions could have global consequences. Trade protectionism does not protect the overall economy or improve inclusiveness; instead, it raises the risk of retaliation, resulting in a lose-lose situation for everyone involved.

Here are five key findings from this year's WTO flagship report.

From 1995 to 2023, the average global per capita income adjusted for inflation increased by about 65%, from $7,050 to $11,570, while it nearly tripled in low- and middle-income economies, rising from $1,835 to $5,337. Approximately, one-third of this unprecedented income convergence can be attributed to low- and middle-income economies' trade openness.

The WTO has also contributed to income convergence by promoting trade reforms and trade policy predictability. WTO membership has, on average, boosted trade between members by 140%. Making deeper commitments to implement specific trade-facilitating reforms in domestic policies during WTO accession (known as Article XII members) further resulted in an additional 1.5 percentage points of average growth rate before joining the WTO and that continued to rise faster afterwards.

The impressive trade-led economic growth of the last 30 years has significantly contributed to reducing extreme poverty. The percentage of individuals in low- and middle-income countries living in extreme poverty decreased from 40% in 1995 to under 11% in 2022, while the share in global exports of these economies doubled from about 16% to 32%. Trade openness tends to lower prices, which benefits low-income households more than high-income households, because they generally consume a relatively larger share of their income on traded goods. In addition, trade can support jobs by connecting low-income individuals to larger markets.

Over the past 30 years, the average level of global income inequality has slightly decreased, although it remains high in absolute terms. While some economies have become more unequal as they integrate into the global market, some of the most open and trade-dependent economies are also some of the most equal in terms of income distribution and living standards. As a result, trade openness and income inequality are only weakly and negatively correlated.

In reality, the gains from trade are not evenly distributed within economies. While individuals may benefit from cheaper prices, larger variety, export opportunities and technological change, they may also face increased foreign competition and may, therefore, either gain or lose from trade openness. These losses can persist if distortions and barriers, such as geographical and labour mobility costs or lack of competition (which tend to disproportionately impact some vulnerable groups and may prevent them from benefiting from new export opportunities) are not addressed.

Trade policies aimed at mitigating the disruptive effects of trade openness by protecting specific groups of individuals are costly and can have unintended consequences, such as increasing the prices of goods consumed by poorer households and the production costs of firms relying on protected but more expensive goods and inputs. Such trade policies can also prove ineffective if affected trading partners retaliate and threaten jobs supported by trade.

Economies that have successfully harnessed trade to drive faster growth have also implemented different domestic complementary policies that have helped them to leverage their comparative advantages, facilitate connectivity to global markets, promote economic adjustment and cushion the adverse impacts of structural change. For instance, education and redistributive policies are more effective in addressing income inequality.

Concerns about the distributional impacts of trade have led to more than 310 regional trade agreements to include explicit provisions related to some of the dimensions of inclusiveness, including human rights, workers’ rights, gender equality, indigenous peoples’ rights and small businesses’ trade participation. While it may be too early to evaluate the effectiveness of many of these provisions, broadening and strengthening international cooperation, including between the WTO and other international organizations dealing with complementary policies, could help better harness the benefits of trade for all.

In an increasingly fragmented world due to geopolitical tensions, maintaining an open and predictable multilateral trading system is essential to prevent the rollback of economic convergence achieved and to support greater inclusiveness.

Disclaimer

The opinions expressed in this column are those of the authors. They do not represent the positions or opinions of the WTO or its Members and are without prejudice to Members' rights and obligations under the WTO. Any errors are attributable to the authors.