Trade as an Engine of Growth: Sputtering but Fixable

Abstract

International trade has been an important engine of output and productivity growth historically. But since the global financial crisis, world trade growth has slowed, reflecting cyclical and structural forces. The COVID-19 pandemic and Russia’s invasion of Ukraine have further disrupted commodity markets, global supply chains and the trade that accompanies them. A removal of impediments that raise trade costs could reinvigorate world trade. Trade costs, on average, roughly double the cost of internationally traded goods relative to domestically sold goods. Tariffs amount to only one-twentieth of average trade costs; the bulk are incurred in shipping and logistics, and trade procedures and processes at and behind the border. Despite a decline since 1995, trade costs remain about one-half higher in EMDEs than in advanced economies; about two-fifths of this gap appears to be due to higher shipping and logistics costs and a further two-fifths due to trade policy. A comprehensive reform package to lower trade costs could yield large dividends. It is estimated that among the worst-performing EMDEs, a hypothetical reform package to improve logistics and maritime connectivity to the standards of the best-performing EMDEs would halve trade costs.

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