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The Trade Delusion

LONDON – Since 2008, global trade has grown slightly more slowly than global GDP. The Doha Round of World Trade Organization negotiations ended in failure. Transatlantic and transpacific trade negotiations are progressing slowly, held back by the resistance of special interests. But, though many experts fear that protectionism is undermining globalization, threatening to impede global economic growth, slower growth in global trade may be inevitable, and trade liberalization is decreasingly important.

To be sure, for 65 years, rapid trade growth has played a vital role in economic development, with average advanced-economy industrial tariffs plummeting from more than 30% to below 5%. The creation of Europe’s single market facilitated increased intra-European trade. Japan, South Korea, and Taiwan achieved rapid economic catch-up on the basis of export-led growth. China has followed the same path over the last 30 years. Trade grew about twice as fast as global output from 1990 to 2008.

But there is no reason why trade should grow faster than GDP forever. Indeed, even if there were no trade barriers at all, trade might grow significantly more slowly than GDP in some periods. Several factors make it possible that we are entering such a period.

For starters, there is the changing pattern of consumption in the advanced economies. Richer people spend an increasing share of their income on services that are either impossible to trade (for example, restaurant meals) or difficult to trade (such as health services). Non-tradable sectors tend to account for a growing share of employment and economic activity.