Opinion & Analysis

The added value of international trade and impact of trade barriers: Cost of Non-Europe Report

Executive summary

It is recognised that GDP growth and trade are interlinked – consequently, measures which facilitate international trade also have positive effects on the development of GDP.

Consensus exists among economists that free trade, in principle, can deliver many beneficial outcomes. However, concerns about the harmful distributional consequences of international trade and adjustment costs are not unjustified. The gains from trade are not shared equally, and trade can hurt some sectors of the population.

Trade liberalisation generates different results across the 28 EU Member States. In certain cases, even if the global impact is positive, certain countries, regions or industrial sectors may face adjustment (costs). A better understanding of how different Member States or industrial sectors are impacted by new trade agreements is important to promote more efficient and better targeted use of the EU’s globalisation adjustment fund, in cases where adjustment costs are heterogeneous and high.

EU prosperity is dependent on international trade. As long-term EU GDP growth predictions are at a lower level than GDP projections for other parts of the world, the EU’s global market-share will decrease should the EU fail to participate in the faster growth in other parts of the world.

Given the increasing tensions surrounding international trade, pressing policy questions have recently shifted away from the consequences of liberalisation or greater openness, to the impact of increased trade barriers. This is problematic because, while there are several underdeveloped and highly protected countries, there are no rich and highly protected countries – and the path from one group to the other passes through trade liberalisation.

Globalisation has increased the growth of global value chains, contributing to increased interconnectedness in global economies. The increase of global value chains has enabled sharing of know-how, and increased specialisation and better allocation of human and financial resources. Changes in the operational environment, whether legal, financial, or competitive, could considerably modify the operating logic of existing global value chains, triggering global value chain changes. An evaluation of the impact of future planned or proposed legislative changes (trade agreements, tariffs etc.) on current global value chains (GVC) should therefore be included in impact assessments accompanying such proposals.

Although it is difficult to estimate the economic impact of trade restrictions, several studies provide information on the potential monetary impact.

Protectionism is inefficient because it does not protect jobs in practice, at least not nearly to the extent policy-makers expect, and generates costs that dwarf any gains in employment. Unintended consequences, inter alia on consumers, on downstream industries and on exporting sectors, can be disproportionately large, even though they are not always apparent at first glance. Not only is the cost per job directly protected very large in many instances, jobs directly protected are actually often outnumbered by those put at risk. In a world of ever-deepening global value chains, the rationale for protection is even more nuanced, since export and import activities are closely intertwined, increasing the efficiency cost of protection.

As a conclusion, it would clearly be in the interest of the EU to continue defending a rules-based trading system. According to this logic, only principled rules-based responses to trade restrictions should be considered.

Read the full report here

©-European-Union-2011, Border crossing between Gaillard in France and Geneve in Switzerland on 15 october 2011.