Global trade growth slowed abruptly after 2010, following decades of expansion. According to the World Trade Organization (WTO), 2015 marked the fourth consecutive year in which annual world merchandise trade growth stayed below 3 percent. The WTO forecasts growth in global trade volume to remain sluggish in 2016, at 2.8 percent. A variety of reasons have been cited for the decelerating growth of trade: sluggish world economy, shorter supply chains, absence of new liberalization on a global scale, and rise of microprotectionism.
As global trade has slowed, the growth rate of productivity—defined as output per hour worked—is declining worldwide.3 Labor productivity growth has slowed markedly since the global financial crisis in most advanced countries and many emerging-market economies (OECD 2016).
The decline in productivity has been a puzzle to many economists—and a concern to policymakers, because productivity growth is a key component of economic growth and rising living standards. Economists disagree about the cause of the decline. Some argue that productivity has improved more than what statistics indicate. Others cite the slowdown in capital investment by both the private and public sectors, as well as the absence of technological breakthroughs and lagging expenditure on research and development (R&D). Still others cite the influx of younger, less skilled employees replacing retired workers.
…had US two-way trade grown at its historical annual rate of 5.86 percent between 2011 and 2014, annual US productivity growth would have been substantially higher than what it was over those four years.
This Policy Brief examines an additional factor: the possibility that reduced volumes of trade have impeded growth in productivity because of diminished competition in national economies and the shrinking role of comparative advantage. Our calculations suggest that had US two-way trade grown at its historical annual rate of 5.86 percent between 2011 and 2014, annual US productivity growth would have been substantially higher than what it was over those four years.
The first section explains why trade is critical to productivity growth by describing the basic Ricardian model and more recent theories about the differences between high- and low-productivity firms in a national economy (firm heterogeneity). These theories lay the foundation for the second section, a review of the empirical literature, which shows evidence on trade-induced productivity gains. The third section presents data on the US economy that document the trade stagnation and productivity slowdown in recent years. It considers—and ultimately rejects—the mismeasurement hypothesis (the argument that conventional statistics miss the contributions of information technology). The fourth section speculates about how productivity might have grown had trade continued growing at its historical rate. It shows that, although factors other than trade—notably physical and human capital accumulation and path-breaking innovations—also drive productivity, the negative contribution of sluggish trade growth is significant. According to our calculations, if US trade had increased at its historical rate, that would have delivered a $74 billion increase in US GDP through supply-side efficiencies in 2014. The concluding section examines the findings in the context of the current antitrade atmosphere in the United States and calls for policies that support freer trade and thus foster productivity growth.