August 13, 2022

Impacts on Global Trade and Income of Current Trade Disputes

The impacts on global trade and income of current trade disputes vary depending on the country. However, they are often less than one percent of GDP. As such, the negative welfare effects of trade disputes tend to be modest. The effects on consumer welfare are often low, particularly for giant economies that have access to plentiful third-party suppliers. Despite the economic costs of trade barriers, a slowdown in the global economy can be damaging.

The benefits of free trade have been unevenly distributed across nations and sectors. Countries with poorer economies have seen their share of world trade fall substantially. Developing countries have a greater need to lower their trade barriers. The world currently comprises 75 developing and transition economies, including nearly all of the least developed countries. These countries depend disproportionately on exports of traditional commodities. The reasons for this marginalization include deep structural problems, weak institutions, and protection at home.

In recent decades, the world economy has been integrated and living standards have increased. Developed countries have shared in prosperity, and even some developing nations have increased their incomes. Today, these countries account for over one third of world trade. The increasing number of developed countries has increased their exports of both goods and services. Some developing countries have opened their economies, while industrial countries have more restrictive trade policies. As a result, they stand to gain more from global trade liberalization than developed countries.

A recent WTO dispute between the U.S. and the European Union has led to a suspension of the U.S. tariffs on aluminum and steel for five years. This suspension in the aircraft dispute was a key factor in the U.S.’s decision to suspend the tariffs. While this suspension will temporarily reduce the impact on global trade and income, it will reduce GDP by 0.22 percent in the long run. These actions have also reduced employment and wages by 173,000 full-time equivalent jobs.

Recent trade disputes between the United States and China may lead to a worldwide protectionist wave and undermine the rules-based international trading system. The World Trade Organization is under threat from this dispute, as the United States failed to replace its members on the Appellate Body. Furthermore, the United States has imposed tariffs on its allies, invoking national security and using Section 301 to declare its first round of tariffs against China.

As tariffs apply to both importers and exporters, the distributional effects of current trade disputes may be negative for a broader range of people and sectors. In some cases, these effects can be much larger than the net economic impact. The tariffs imposed by the US on Chinese goods may well cause inflation and food security problems in poorer countries. In such a scenario, the economic costs of these tariffs will fall disproportionately on smaller companies, who cannot afford to negotiate lower prices with Chinese suppliers.

While the impacts on global trade are negative, they are unlikely to affect the overall welfare of a country. For example, trade diversion and creation of free trade zones reduce global welfare. On the other hand, the creation of free trade areas has a positive effect on consumer and exporters in both countries. Moreover, a free trade zone also creates jobs, thereby enhancing the welfare of global citizens.

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