Lowering trade barriers improves income distribution and economic resiliency

Abstract

The U.S.-China trade war, COVID-19 pandemic and Russian invasion of Ukraine contributed to calls for greater economic self-sufficiency by exposing gaps in international collaboration and the uncertainty of global supply chains. In this study, we apply a comprehensive global modeling framework to enhance understanding of the potential impacts of fragmentation of global value chains. Supporting the general argument toward economic benefits from open markets our analysis contributes to the policy debate in two important dimensions of this phenomenon—distributional impacts and economic resiliency. We find that tariff liberalization and trade facilitation measures implemented by developing countries could not only reduce between-country inequality but also result in progressive within-country income distribution primarily through lowering food prices, as well as increasing unskilled wages. In addition, using a case study of disruption to Thailand’s electronics industry, we find higher resiliency of developing countries to external shocks in the globalized (as opposed to a localized) world.