# 13. Trade, Poverty, and Inequality

_<mark>Bob Rijkers and Erhan Artuc</mark>_ International integration accelerates growth and reduces poverty when it is supported with strong institutions, rule of law, and investment.<sup>145</sup> Historically, episodes of rapid growth are associated with increasing international integration and trade. Many East Asian economies, such as Japan, the Republic of Korea and China have managed to attain remarkable growth rates while integrating into the global economy. Conversely, many slow growing regions are left out of the globalization process.

Despite the compelling associations between international integration and growth, empirical evidence on the causal relationship is more limited. This is because separating the impact of trade from other developments that overlap with episodes of increasing globalization, such as technological progress, is challenging.<sup>146</sup> To accurately quantify the gains from trade it is also necessary to account for the structure of global value chains, input‐output linkages, knowledge spillovers, pro‐competitive effects, and other mechanisms that may amplify them. In addition, trade may create dynamic gains which can be sizable. A recent study of the impact of WTO accession on patenting, for example, finds that about 7 percent of the increase in knowledge creation during the 1990s can be attributed to trade policy reforms.<sup>147</sup> Studies that exploit quasi‐experimental variation in trade costs generated by shocks as varied as the closing of the Suez Canal,<sup>148</sup> the reunification of Germany,<sup>149</sup> oil price fluctuations,<sup>150</sup> and major infrastructure expansions<sup>151</sup> consistently show that reducing trade costs improves incomes on average.

Although globalization has been a force for development for the last three decades, protectionism is now on the rise. One reason is the frustration of those whom trade may have left permanently behind. International trade is not a zero‐sum game, as it increases the size of the pie. However, it also changes how the pie is divided, creating winners and losers. The losses often are highly visibly concentrated among specific people in specific areas. The gains, by contrast, are often widely spread and therefore less salient. This undermines political support for global integration.

> 145 <mark>Atkin, David, and Amit Khandelwal (forthcoming). “How Distortions Alter the Impacts of International Trade in Developing Countries,”</mark> _<mark>Annual Review of Economics</mark>_ <mark>.</mark>

> 146 <mark>Harrison, Ann, John McLaren, and Margaret McMillan (2011). “Recent Perspectives on Trade and Inequality,”</mark> _<mark>Annual Review of Economics,</mark>_ <mark>3 (1)</mark> _<mark>.</mark>_

> 147 <u>Coelli, Federica, Andreas Moxnes, Karen Helene Ulltveit‐Moe</u> “Better, Faster, Stronger: Global Innovation and Trade Liberalization” NBER Working Paper No. 22647.

> 148 ‐‐ Feyrer, James (2009). “Distance, Trade, and Income <u>The 1967 to 1975 Closing of the Suez Canal as a Natural Experiment,” Mimeo.</u>

> 149 Redding, Stephen, and Daniel Sturm (2008). “The Costs of Remoteness: Evidence from German Division and Reunification” American Economic Review, 98(5).

> 150 Storeygard, Adam (2016). “Farther on Down the Road: Transport Costs, Trade and Urban Growth,” _Review of Economic Studies,_ 83(3).

151 Donaldson, Dave, and Richard Hornbeck (2016). “Railroads and American Economic Growth: A “Market Access” Approach,” _The Quarterly Journal of Economics_ , 131 (1).

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