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The Two Rabbits of International Trade

SEOUL – If you chase two rabbits at once, the old saying goes, both will escape. And yet this is precisely what many governments are required to do: pursue both growth and distributional fairness. The two objectives, though not incompatible, are entirely different from one another, and few policy tools can simultaneously help to achieve both.

This idea matters a lot in trade policy. Much theoretical and empirical research demonstrates that opening trade can spur a country’s GDP growth. But increasing a pie’s size does not guarantee that it will be shared fairly.

Often, the incremental growth that comes with a trade opening is unevenly shared; moreover, in many cases, some receive a smaller share than they did before. Here is where government must intervene using its traditional tools, taxation and redistribution, as well as complementary policies such as social safety nets and adjustment assistance.

Similarly, from a global perspective, opening trade can contribute to the world’s overall economic growth, but does not guarantee that the benefits will be fairly distributed among countries. Some say that no country loses, in absolute terms, from opening trade; otherwise, they would not participate in free-trade deals. Still, the uneven distribution of the benefits created by a global trade opening means that some countries, especially the least developed, gain little in comparative terms, and are possibly even hurt.