# I. Introduction

Global trade, powered by trade liberalization and falling transport costs, has historically been an important engine of output and productivity growth. In recent decades, it has helped to lift around 1 billion people out of poverty and many developing countries to integrate into the world economy. Empirical studies indicate that a 1 percentage point of GDP increase in trade openness has lifted per capita income by 0.2 percent (World Bank 2020a). A large part of the gains from trade can be attributed to the expansion of global value chains (World Bank 2020a). Participation in global value chains generates efficiency gains and supports the transfer of knowledge, capital, and other inputs across countries, thereby boosting productivity. Global value chain integration has also been associated with reduced vulnerability of economic activity to domestic shocks, although it has come with increased sensitivity to external shocks (Constantinescu, Mattoo, and Ruta 2020; Espitia et al. 2021).

In the past decade and a half, global trade growth has slowed as global value chains have matured, investment weakness has weighed on goods trade, and trade tensions have emerged between major economies (World Bank 2015, 2017; figure 1). As a result, instead of being twice as fast as global output growth, as it was during 1990-2011, the growth of global trade in goods and services in 2011-19 was just about as fast as global output growth. During the COVID-19 pandemic, global trade was hit particularly hard, falling by nearly 16 percent in the second quarter of 2020. The subsequent rebound was swift, however, especially for goods trade, and much faster than after the 2007-09 global financial crisis. That said, in 2021, global trade growth slowed again, disrupted by lockdowns and closures in the midst of new COVID-19 outbreaks and the emergence of significant supply chain strains in a number of sectors. A further blow to supply chains and trade was dealt by Russia’s invasion of Ukraine in February 2022, which dislocated global commodity markets and manufacturing processes that rely on specialized inputs from Russia or Ukraine.

Absent a major policy effort, trade growth is likely to weaken further over the remainder of the 2020s, given the prospect of slower output growth and the fact that some of the key structural factors that supported rapid trade expansion in the past have largely run their course. Although supply chains have been remarkably resilient given the magnitude of recent shocks, the COVID-19 pandemic and Russia’s invasion of Ukraine could accelerate changes in supply chains that were already underway, including by further in-sourcing or regionalizing production networks and increasing digitalization. A contraction of supply chains may lower the output elasticity of trade further, continuing a process that has been underway since 2010 (Timmer et al. 2021). Multinational corporations operating in EMDEs have already increased the use of digital technologies and enhanced their diversification of suppliers and production sites to increase their resilience to supply-chain shocks (Saurav et al. 2020). As multinationals seek to diversify, EMDEs may have new opportunities to integrate into global supply chains, provided they can offer a conducive business environment, such as a skilled