Evaluating the impact of international trade on the economy depends on definitions of economic progress. For example, year-over-year improvements in the metrics of gross domestic product (GDP) or GDP per capita can measure changes in the overall economic position of a nation (Krugman & Wells, 2009; Mankiw, 2011). However, these metrics offer limited insight into the question of whether everyone benefits from international trade. Consider the case of China, which, over the past three decades, has increased its GDP and GDP per capita by impressive figures (Yin & Vaschetto, 2011). A significant portion of Chinese GDP improvement has been driven by improvements in the Chinese manufacturing sector, which disproportionately enriches factory owners, downstream manufacturing suppliers, and related social elements (Elu & Price, 2010). There are millions of Chinese people, particularly in rural China, who remain impoverished (Krugman & Wells, 2009). In the United States, too, the recent growth of the economy has disproportionately benefited the very wealthy. The Gini coefficient, a measure of income inequality between a nation’s quintiles, indicates that the richest Americans control a greater proportion of the country’s wealth than at any time for which such economic data are available (WB, 2015).
Drawing upon these kinds of examples, it is possible to argue that international trade can in fact improve the economic position of a nation as a whole without improving every individual citizen’s economic outcomes concomitantly. International trade is an activity that is particularly profitable for certain segments of society and less profitable, or even economically damaging, to others. In the case of the United States, the migration of manufacturing jobs to foreign countries benefits (a) the owners of American manufacturing firms (whose salaries and stock-based net worth increase); (b) the owners of foreign companies that supply labor; and (c) foreign workers, but at the expense of an American middle class that historically provided a native manufacturing workforce. In the United States, the ongoing stratification of the country into a class of very rich and a class of very poor constitutes some proof for the claim that, in an era of globalization, the American middle class is squeezed. While international trade can certainly increase the net number of jobs, there is no guarantee that this job creation is equally distributed across the trading nations. A zero-sum scenario—one in which the gain of jobs in one country necessarily means the loss of jobs in the other country—is more likely. Of course, one possible argument is that individuals squeezed out of jobs in this scenario are forced to migrate up the value chain to even better jobs, but, in the United States, ongoing income stratification occurs that this scenario is simply not taking place.
If I believed that market-based economies were inherently stable, I would also believe that markets were the solution to providing the public goods listed in Table 2.5. In such a scenario, I would not trust in the power of international institutions based on fiat to provide these kinds of goods. Rather, market actors would continue to ensure the accessibility of these public goods. However, regardless of my own personal views about market stability, it is possible that different countries would have different levels of belief in the strength of open markets, which would require some kinds of coercive international institutions to ensure the integrity of the global market.
For example, in terms of open markets, the World Trade Organization (WTO) would be extremely important, as individual nations’ attempts to engage in protectionism or engage in other kinds of challenges to market functioning could be challenged in court. The WTO has a long and successful record of resolving trade disputes of this kind (Dijofack-Zebaze & Keck, 2009; Gaines, Olsen, & Sorensen, 2012; Ismail, 2010; Petersmann, 1999; Sacerdoti, Yanovich, & Bohanes, 2006). In terms of capital flows to less developed countries, international money for the settlement of international debts, and last-resort lending, the continued function of the International Monetary Federation (IMF) and World Bank would be extremely important (Clegg, 2012; Eichengreen, 2000). The IMF would be of particular importance in terms of guaranteeing capital flows to less-developed countries; indeed, the IMF has dedicated funds for this purpose, which it has deployed extensively in the context of Sub-Saharan Africa (Clegg, 2012; Eichengreen, 2000). Both the IMF and the World Bank could help to arrange credit lines for international debt settlement and also to facilitate last-resort lending.
In such scenarios, I would have more faith in the WTO to support open markets. Looking at the history of the IMF and World Bank, there is substantial evidence that these two international institutions make extensive use of conditionality when extending loans and grants (Foli & Béland, 2014; Nega & Schneider, 2012; Raimundo, 2014). Conditionality is, in theory (Foli & Béland, 2014; Nega & Schneider, 2012; Raimundo, 2014), designed to assist and encourage recipient nations to make structural economic reforms; however, in practice, conditionality has often (and quite ironically) been utilized to nudge less-developed countries towards policy directions that are in fact antithetical to open markets (Foli & Béland, 2014; Nega & Schneider, 2012; Raimundo, 2014). It seems appropriate to establish some more robust kind of oversight that might reduce the impacts of conditionality on less-developed countries that require donor aid or borrowed funds.
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- Yin, J. Z., & Vaschetto, S. (2011). China’s business engagement in Africa. Chinese Economy, 44(2), 43-57.