WORLD TRADE REPORT 2024

Trade and inclusiveness

How to make trade work for all
What is the World
Trade Report?
The World Trade Report is an annual
publication that aims to deepen
understanding about trends in trade,
trade policy issues and the multilateral
trading system.

What is the 2024

Report about?
The 2024 World Trade Report explores
the complex interlinkages between trade
and inclusiveness across and within
economies, and discusses how trade
policies need to be complemented by
appropriate domestic policies to make
the benefits of trade more inclusive.

Find out more

Website: www.wto.org
General enquiries: [email protected]
Tel: +41 (0)22 739 51 11
TRADE AND INCLUSIVENESS:
HOW TO MAKE TRADE WORK FOR ALL

CONTENTS
Acknowledgements and Disclaimer.. . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 2
Abbreviations. . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 4
Foreword by the WTO Director-General. . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 6
Executive summary.. . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 8

Chapter A. Introduction.. . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 18

Chapter B. Trade and income convergence. . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 30

1. G
 lobalization has led to income convergence, but some economies have been left behind. . . . . . . . . . . . . . . . . . . . . . . . . . 32
2. H ow did the integration of low- and middle-income economies into global markets boost
income convergence?.. . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 35
3. W hy have some developing economies gained little from globalization?. . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 40
4. Future opportunities for economic convergence lie in strategies to keep trade open and
supported by complementary policies .. . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 55
5. C onclusions.. . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 63

Chapter C. Trade and inclusiveness within economies.. . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 66

1. T
 rade raises overall incomes and reduces poverty without necessarily increasing inequality. . . . . . . . . . . . . . . . . . . . . . . . . 68
2. M ost people gain from trade but some suffer losses. . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 71
3. F airer trade policies and domestic complementary policies are crucial to make trade more inclusive. . . . . . . . . . . . . . . . 86
4. Inclusive trade is set to undergo transformation amid emerging global trends.. . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 91
5. C onclusions.. . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 94

Chapter D. Inclusive trade and international cooperation. . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 96

1. E nsuring that the WTO leaves no economy behind. . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 98
2. M aking the WTO and trade more inclusive for people and firms.. . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 118
3. P romoting inclusive development through enhanced international cooperation.. . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 124
4. C onclusions.. . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 135

Chapter E. Conclusions. . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 138

Opinion pieces
Landry Signé, “Leveraging trade to foster a more inclusive digital economy in Africa”. . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 58
Stefanie Walter, “The complex interplay between inequality and attitudes about globalization”. . . . . . . . . . . . . . . . . . . . . . . . 90
Giovanni Maggi, “Soft rules and the informational role of the WTO”. . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 112
Emanuel Ornelas, “Can regional and multilateral trade liberalization work in tandem?”. . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 127
Alonso Alfaro Ureña, Benjamin Faber, Cecile Gaubert, Isabela Manelici, José Pablo Vásquez,
“The promise and pitfalls of responsible sourcing in global value chains”. . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 133

Bibliography. . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 141

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WORLD TRADE REPORT 2024

ACKNOWLEDGEMENTS
The World Trade Report 2024 was prepared under the general responsibility and guidance of Johanna Hill,
WTO Deputy Director-General, and Ralph Ossa, Director of the Economic Research and Statistics Division.
Director-General Ngozi Okonjo Iweala, Chief of Staff Bright Okogu and Trineesh Biswas from the Office of the
Director-General provided valuable advice and guidance.

The report was coordinated by Jose-Antonio Monteiro and Roberta Piermartini. Preparation of the chapters was
led by Marc Bacchetta, John Hancock, Stela Rubínová and Victor Stolzenburg. The main authors of the report are
Marc Bacchetta, Eddy Bekkers, Michael Blanga-Gubbay, John Hancock, Kathryn Lundquist, Gabrielle Marceau,
José-Antonio Monteiro, Roberta Piermartini, Yves Renouf, Stela Rubínová, Victor Stolzenburg and Ankai Xu.

Contributions were also provided by Marc Auboin, Graham Cook, Adrian Bourqui Costa, Barbara D’Andrea,
Florian Eberth, Emmanuelle Ganne, Jenya Grigorova, Nicolas Grimblatt, Tomasz Gonciarz, Dolores Halloran,
Simon Hess, Bernard Kuiten, Théo Mbise, Wolf Meier-Ewert, Juan Pablo Moya Hoyos, Taufiqur Rahman, Daria
Shatskova, Monia Snoussi-Mimouni, Gerard Peñalosa, Thomas Verbeet, Claude Trolliet and the Cotton team of
the Agriculture and Commodities Division.

Valuable research assistance was provided by Uzochukwu Alutu, Aditya Bhandari, Waleed Hassan, Lee
Humphreys, Hryhorii Kalachyhin, Jeffrey Liu, Tinotenda Mataire, Jil Mössler, Lema Rahimi, Alisha Saini, Fulvio
Silvy, Aaron Tang, Yu Wang and Xinbei Zhou.

The following divisions in the WTO Secretariat provided valuable comments on drafts of the report:
Agriculture and Commodities Division (Dixit Diwakar, Jonathan Hepburn, Cédric Pene), Development
Division (Shraddha Gautam, Taufiqur Rahman, Daria Shatskova), Legal Affairs Division (Jorge Castro,
Graham Cook, Sybilla Fries, Jenya Grigorova, Juan Pablo Moya Hoyos, Gerard Penalosa), Intellectual Property,
Government Procurement and Competition Division (Anna Caroline Müller, Antony Taubman), Trade in Services
and Investment Division (Pamela Apaza Lanyi, Elena Bertola, Antonia Carzaniga, Xiaolin Chai, Markus Jelitto,
Juan Marchetti, Martin Roy), Trade and Environment Division (Rainer Lanz, Erik Wijkstrom), Rules Division
(Seref Gokay Coskun, Clarisse Morgan) and Vision and Strategy (Willy Alfaro).

Opinion pieces were provided by Alonso Alfaro Ureña (Universidad de Costa Rica), Benjamin Faber (University
of California, Berkeley), Cecile Gaubert (University of California, Berkeley), Giovanni Maggi (Yale University),
Isabela Manelici (London School of Economics), Emanuel Ornelas (Sao Paulo School of Economics), Landry
Signé (Brookings Institution), José Pablo Vásquez (London School of Economics) and Stefanie Walter (University
of Zurich).

In coordination with Andreas Sennekamp of the Institute for Training and Technical Cooperation Division, supported
by Shraddha Gautam, contributions were also received from the following WTO Chairs: Azam Chaudhry, Nida
Jamil and Theresa Thompson Chaudhry (Lahore School of Economics), Nguyen Huong Giang and Pham Thi Cam
Anh (Foreign Trade University), and Boopen Seetanah and Verena Tandrayen-Ragoobur (University of Mauritius).

The following individuals from outside the WTO Secretariat provided useful comments during the initial
drafting stage of the report: David Atkin, Kyle Bagwell, Emily J. Blanchard, Pinelopi Koujianou Goldberg,
Douglas Irwin, Réka Juhász, Giovanni Maggi, Nina Pavcnik, Robert W. Staiger, Claudia Steinwender and Daniel
Trefler.

The text production of the report was managed by Anne Lescure and Diana Dent of the Economic Research
and Statistics Division. The production of the report was managed by Anthony Martin and Helen Swain of the
Information and External Relations Division. William Shaw and Helen Swain edited the report. Gratitude is also
due to the translators in the Languages, Documentation and Information Management Division for the high
quality of their work.

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TRADE AND INCLUSIVENESS:
HOW TO MAKE TRADE WORK FOR ALL

DISCLAIMER
The World Trade Report has been prepared under the responsibility of the WTO Secretariat. It does not
necessarily reflect the positions or opinions of WTO members and it is without prejudice to their rights
and obligations under the WTO agreements. The opinions expressed and arguments employed herein are
not intended to provide any authoritative or legal interpretation of provisions of the WTO agreements and
shall in no way be read or understood to have any legal implications. The terms and illustrations used in
this publication do not constitute or imply an expression of opinion by the WTO Secretariat concerning
the status or boundaries of any territory. The opinion pieces written by the external contributors are the
sole responsibility of their respective authors.

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ABBREVIATIONS
AGOA African Growth and Opportunity Act
AI artificial intelligence
EIF Enhanced Integrated Framework
FAO Food and Agriculture Organization of the United Nations
FDI foreign direct investment
GATS General Agreement on Trade in Services
GATT General Agreement on Tariffs and Trade
GDP gross domestic product
GPA Agreement on Government Procurement
GSP Generalized System of Preferences
GVC global value chain
ICT information and communications technology
IEA International Energy Agency
IEC International Electrotechnical Commission
IFC International Finance Corporation
IFD Investment Facilitation for Development
ILO International Labour Organization
IMF International Monetary Fund
IP intellectual property
ISO International Organization for Standardization
IT information technology
ITU International Telecommunication Union
LDC least-developed country
MFN most-favoured nation
MNE multinational enterprise
MSME micro, small and medium-sized enterprise
NFTC national trade facilitation committee
NTM non-tariff measure
PPP purchasing power parity
OECD Organisation for Economic Co-operation and Development
R&D research and development
RS responsible sourcing
RTA regional trade agreement
S&DT special and differential treatment
SCM subsidies and countervailing measures
SEZ special economic zone
SOE state-owned enterprise
SPS sanitary and phytosanitary
STDF Standards and Trade Development Facility
SVE small, vulnerable economy
TBT technical barriers to trade

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TRADE AND INCLUSIVENESS:
HOW TO MAKE TRADE WORK FOR ALL

TFA WTO Trade Facilitation Agreement

TRIMs Trade-Related Investment Measures
TRIPS Trade-Related Aspects of Intellectual Property Rights
UN United Nations
UNCTAD UN Trade and Development
UNEP UN Environment Programme
UNFCCC United Nations Framework Convention on Climate Change
UN-ESCAP UN Economic and Social Commission for Asia and the Pacific
WHO World Health Organization
WIPO World Intellectual Property Organization
WOAH World Organisation for Animal Health
WTO World Trade Organization

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FOREWORD BY
THE WTO
DIRECTOR-GENERAL

The mission of the World Trade Organization, as specialization, scale and competition. Lower-
set out in the preamble to its founding Marrakesh priced imports lifted household purchasing power,
Agreement, is to use trade as a means to raise living especially at the bottom of the income distribution.
standards, create jobs and promote sustainable As more developing economies reformed at home and
development. As we mark the WTO’s 30th anniversary, tapped into external demand for goods and services,
it is clear that members have used the open and their share in global trade increased sharply. With
predictable global economy anchored in WTO rules strong income growth in low- and middle-income
and norms to accelerate growth and development, economies, the proportion of their populations
with enormous positive impacts for human well-being. living in extreme poverty fell from 40 per cent
At the same time, many people and places have not in 1995 to under 11 per cent in 2022. China was only
shared adequately in these gains. part of this story: take it out of the equation, and the
poverty rate in low- and middle-income economies
This year’s edition of the World Trade Report, titled declined from 36 per cent in 1996 to under 14 per cent
“Trade and Inclusiveness: How to make trade work in 2022. Never before have the living conditions and
for all”, looks at how the world has been transformed prospects of so many people improved so rapidly.
through trade – and at how we can use trade and other
policies to improve the lives and livelihoods of people During this period, for the first time since the Industrial
who remain on the margins of the global economy. Revolution two centuries earlier, poor countries began
to narrow the per capita income gap with rich ones –
Perhaps the biggest takeaway from the report is its until the COVID-19 pandemic halted this convergence
reaffirmation of trade’s transformative role in reducing by hitting the weakest economies hardest.
poverty and creating shared prosperity – contrary
to the currently fashionable notion that trade, and Analysis showcased in this report shows that trade
institutions like the WTO, have not been good for policy reforms played an important role in this growth
poverty or for poor countries, and are creating a more story. Trade cost reductions increased global real GDP
unequal world. by 6.8 per cent between 1995 and 2020 – and by
33 per cent in low-income economies. Economies that
But the second biggest takeaway is that there is much took on more reform and liberalization commitments
more we can do to make trade and the WTO work as part of their WTO accession negotiations saw a
better for economies and people left behind during the 1.5 percentage point boost to their annual growth
past 30 years of globalization. rates, and also attracted more capital investment.

The report describes how, over the past three And yet many poor countries, particularly in Africa,
decades, open global markets, underpinned by Latin America and the Middle East, remained on the
the WTO, gave rise to a boom in trade, enabling margins of global trade, and were lagging behind
the productivity gains that came with greater on income convergence even before the pandemic.

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TRADE AND INCLUSIVENESS: FOREWORD BY THE WTO DIRECTOR-GENERAL
HOW TO MAKE TRADE WORK FOR ALL

In some rich countries, many people felt left behind, to close the digital divide, with investments in digital
unable to benefit from new opportunities – and connectivity, infrastructure and digital skills, as
their frustration fuelled a political backlash against well as in creating an enabling legal and regulatory
international trade. environment.

This report looks in detail at the various factors that More broadly, countries need to act to ensure that
have held back individuals, firms and economies from as many of their citizens as possible can benefit from
capitalizing on, and adjusting to, international trade. the opportunities created by open and rules-based
These range from high trade costs that constrain international markets – or are, at least, cushioned
countries’ access to foreign markets or cheap inputs, to against the downsides of economic change, whether
the mobility and information frictions, skill mismatches these are due to technological change or to increased
and limited access to finance that, too often, prevent import competition. This means investing in education
people from seizing new opportunities. and infrastructure, maintaining an appropriate
competitive environment, implementing effective
The report finds that trade is part of the solution to
adjustment and redistribution policies including active
making the global economy more inclusive – but also
and passive labour market support, avoiding a race to
that trade policy alone is insufficient to achieve this goal.
the bottom on taxation, and so forth.
Protectionism, the report demonstrates, is not an
The report makes the case that enhanced coherence
effective path to inclusiveness: restricting trade is
across international organizations would magnify their
typically an expensive way to protect jobs for specific
collective impact on inclusiveness. At the WTO, we
groups within society, and can raise production costs,
recognize these interlinkages, and have been working
while inviting costly retaliation from disgruntled trading
with partner international organizations to this end. For
partners.
instance, the WTO and the World Bank have launched
A more promising path towards a global economy that the “Digital Trade for Africa” project to support
works for everyone lies in what we at the WTO have been African economies’ efforts to build the necessary hard
calling “re-globalization” – bringing more economies and soft infrastructure to take advantage of digital
and communities from the margins to the mainstream of trade opportunities. The WTO and the International
the global economy by helping them attract more trade- Trade Centre have launched a US$ 50 million global
oriented investment. Fast-growing trade in digitally- fund for women exporters in the digital economy.
delivered services and environmental goods offer Further collaborative efforts could range from simple
exciting opportunities, with digital trade in particular information exchanges to formal partnerships.
lowering the bar for enabling underrepresented
I hope that readers – and especially, policymakers – will
economies, small businesses and women entrepreneurs
take to heart the lessons from this report. Maintaining
to connect to international markets. In an era when
open and predictable rules-based trade should be part
global supply chains have exhibited some vulnerabilities,
of any country’s path to greater inclusiveness. There is
deconcentrating and diversifying them to business-
no substitute for complementary domestic policies: to
friendly but underrepresented regions and economies
make trade work for more people, the wider economy
can be part of fostering inclusiveness, while also
needs to work for everyone. And we need strong and
building global resilience.
renewed political support for multilateral cooperation
The WTO remains a cornerstone for international to make trade work for all.
trade cooperation, and new and prospective rules in
areas such as investment facilitation for development,
services domestic regulation and digital trade
promise to advance the re-globalization process.
But a key finding of this report is that rules for open
and simplified trade are not enough to support
inclusiveness between and within economies – they
need to be complemented with other policies at the Dr Ngozi Okonjo-Iweala
domestic and international levels. Director-General
For example, while global rules for digital trade at the
WTO would create new commercial opportunities in
the sector, extending the reach of those opportunities
to everyone who could benefit would require action

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EXECUTIVE SUMMARY
Never before have the living conditions and solely on trade and trade policy would not fully capture
prospects of so many people changed so these opportunities. Complementary domestic policies
dramatically in the space of a few decades. Since are required to make trade more inclusive. Significant
the establishment of the WTO 30 years ago, the world progress can be made at the national level to enhance
has witnessed a period of unprecedented income the effectiveness of national policies for economic
growth and convergence, as the wide gap in income growth and inclusiveness, but international cooperation
levels between economies has narrowed. Between among economies can also be beneficial. In addition,
1995 and 2023, global per capita income, adjusted increased coherence between the WTO and other
for inflation, increased by approximately 65 per cent, international organizations can help to magnify their
while the per capita income of low- and middle- collective impact on growth and inclusiveness.
income economies almost tripled. This impressive
Chapter B delves into the challenges faced by
economic growth has significantly contributed to
certain economies in integrating into the global
reducing poverty, malnutrition and infant mortality, and
market and diversifying, and argues that sustained
has improved access to education, healthcare and
economic growth would be most effectively
electricity. A rapid expansion in international trade was
achieved through open trade supported by
a major factor in this impressive economic growth.
complementary policies that facilitate the
Recent debates about trade, development economy’s structural transformation.
and inclusiveness have sometimes minimized
Income convergence has progressed over the
or overlooked these achievements. Growing
last 30 years, but it has slowed since the global
concern about income inequality levels, which remain
financial crisis of 2007-08, and took a backward
high in most economies, have led some to argue
step during the COVID-19 pandemic. Between
that globalization is detrimental to development and
1995 and 2023, per capita income in low- and middle-
inclusiveness because it favours wealthy economies
income economies, adjusted for inflation, almost
and individuals, leaving marginalized groups and
tripled, from US$ 1,835 to US$ 5,337; in comparison,
regions behind. Recent crises, such as the COVID-19
global per capita income increased by approximately
pandemic, revealed genuine vulnerabilities in supply
65 per cent, from US$ 7,050 to US$ 11,570. This
chains, and fuelled perceptions that globalization
unprecedented income convergence was associated
exposes economies to excessive risks. Despite the
with a steep increase in the participation of low- and
remarkable poverty reduction of recent decades, a
middle-income economies in international trade (see
staggering 712 million people worldwide still live in
Figure 1). Between 1995 and 2022, the share of low-
extreme poverty.
and middle-income economies in global trade grew
Against this backdrop, the World Trade Report from 21 per cent to 38 per cent, while the share of
2024 examines how international trade and trade between developing economies in world trade
trade policies contribute to making the global almost quadrupled, increasing from 5 per cent in 1995
economy more inclusive. While trade has played a to 19 per cent in 2021. However, this convergence
crucial role in promoting global economic convergence process has slowed since the global financial crisis, as
and reducing poverty, some individuals, regions and the average share of trade in GDP of low- and middle-
economies have been left behind by not being able income economies has remained relatively constant.
to benefit to the same extent from trade. The report Economic convergence even went into reverse during
analyses how trade and trade policy can be part of the the COVID-19 pandemic, which hit growth in poorer
solution to make trade and the global economy more economies hardest.
inclusive.
Trade reforms have accelerated the structural
Integrating open trade with other key policy transformation of low- and middle-income
areas is essential to spread the benefits of economies, contributing to income convergence.
trade to all. At present, trade does not always benefit Access to foreign markets for both exports and imports
everyone; this is not solely due to trade policies, but has boosted sectoral productivity through greater
often to domestic policies as well. The Report’s main economies of scale, competition, technology diffusion
conclusion is that reducing trade would diminish and innovation. Foreign direct investment (FDI) within
opportunities for growth and inclusiveness, but relying global value chains (GVCs) has further contributed

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TRADE AND INCLUSIVENESS: EXECUTIVE SUMMARY
HOW TO MAKE TRADE WORK FOR ALL

Figure 1: Positive correlation between low- and middle-income economies’ convergence speed
and trade participation, 1996-2021
Speed of income convergence (percentage points)

8 160

7
140

Trade participation (100=1996)

6

5 120

4
100
3

2 80

1
60
0

-1 40
97

99

01

03

05

09

11

13

15

17

19

21
04

06

08

10

12

14

16

18

20
96

98

00

02

07
20

20

20

20

20

20

20

20

20
19

19

20

20

20

20

20

20
20

20

20

20

20
19

19

20

20

Speed of income convergence Trade participation

Source: Authors’ calculations, based on World Bank data on nominal GDP and real GDP per capita and WTO data on trade in goods and
commercial services.
Note: The figure displays the evolution over time of the population-weighted averages of trade participation and income convergence speed
between 1996 and 2021. The trade participation index is the share of goods and commercial services trade in GDP, adjusted for country size.
Speed of income convergence is expressed as the difference between the average real GDP per capita growth rate of low- and middle-income
economies and the average growth rate in high-income economies. The light blue fill indicates a contribution of negative growth in high-income
economies. The income groups are based on the 1995 World Bank classification.

to the diffusion of new technologies, innovation and High trade costs and limited diversification
production upgrading, in particular in middle-income hamper convergence. Some economies have
economies. Empirical evidence finds that unilateral trade not fully benefited from globalization because high
reforms in developing economies have, on average, tariffs at home and abroad, low regional integration,
boosted economic growth by 1 to 1.5 percentage administrative red tape, poor physical and digital
points, potentially resulting in a 10 to 20 per cent higher infrastructure, geographical remoteness and
incomes over a decade. WTO simulation analysis further weak institutions have limited their integration into
suggests that trade cost reductions between 1995 and international markets, and with it, diminished their
2020 led to a 6.8 per cent increase in global real GDP access to foreign technology and to affordable high-
over the period, with low-income economies growing by quality inputs. Exporters in poor economies often lack
the capacity to comply with foreign market standards
around 33 per cent.
and technical regulations, and may struggle to utilize
Income convergence and global economic preferential access to large markets. Meanwhile,
integration have been uneven, leaving some some other economies, despite more active
economies behind. Between 1996 and 2021, one participation in global trade, have failed to leverage
third of initially low- and middle-income economies trade for development due to a lack of diversification
grew slower than the average high-income economy in their production and export baskets. For example,
in income-per-capita terms, meaning that the economies that are specialized in capital-intensive
income gap between them was expanding instead of extractive and primary sectors can be vulnerable to
narrowing (see Figure 2). These diverging economies, commodity price volatility, and can fail to achieve
many of them least-developed countries (LDCs), sustained growth because of macroeconomic
represent 13 per cent of the global population and are instability.
mainly in Africa, Latin America and the Middle East. Impediments to structural transformation and a
Low- and middle-income economies that have lagged limited ability to adopt foreign technologies can
behind (i.e., diverged or converged at a very slow rate) also prevent certain economies from reaping
generally tend to engage less in international trade, the gains from trade. Trade fosters growth by
receive less FDI, rely more on commodities, export enabling the import of technology and know-how, and
less complex products, and their trade tends to be by leveraging external demand to shift workers and
concentrated on fewer partners. resources from subsistence work to more productive

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 Figure 2: Many low- and middle-income economies are lagging behind, 1996-2021
7

6
Speed of income convergence (percentage points)

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-2

-3
-1.6 -1.2 -0.8 -0.4 0 0.4 0.8 1.2 1.6 2.0 2.4
Average trade participation gap (percentage points)

LDCs Low-income economies Lower middle-income economies Upper middle-income economies Commodity exporters

Source: Authors’ calculations, based on World Bank data on nominal GDP and real GDP per capita and WTO data on trade in goods and
commercial services.
Note: The figure displays the correlation between trade participation and convergence speed of economies that were low- or middle-income
in 1995. The trade participation gap is the share of goods and commercial services trade in GDP, adjusted for country size, expressed as a
percentage difference from the income group average. Income convergence speed is the annualized real income per capita growth between
1996 and 2021 expressed as the difference from the average growth in high-income economies. Economies below the horizontal axis did
not converge in their per capita incomes towards high-income economies. Economies on the left of the vertical axis had an average trade
participation below their income group average. The income groups are based on the 1995 World Bank classification. The LDC group is based
on the United Nations (UN) classification.

activities in tradable sectors. However, these disasters and whose populations are especially exposed
adjustment processes require functioning domestic to changing rainfall patterns. Meanwhile, automation and
capital, labour and land markets, macroeconomic digitalization in manufacturing is eroding opportunities
stability and effective governance. An economy’s for the traditional manufacturing-led economic growth
ability to integrate new technologies also depends on and employment model.
having policies that improve the business environment
and attract FDI, and that aim to develop a skilled Reducing trade costs is crucial to leverage future
workforce and competitive local supply chains, as opportunities for trade-led growth. Diversifying
well as on having a well-functioning infrastructure for GVCs, increasing trade in services, and developing
energy, telecommunications and transport. trade in renewable energies and in critical minerals
for climate technologies can create new opportunities
Geopolitical tensions, the technological
for low- and middle-income economies. It is essential
revolution and climate change pose significant
to address trade costs in services, bridge the digital
risks to economic convergence, both in terms of
divide, and tackle regulatory capacity and compliance
unwinding past achievements and endangering
issues if low- and middle-income economies are to
future prospects. Continued fragmentation of the
take full advantage of these opportunities. Improving
global economy under geopolitical pressures would
disproportionately impact low-income economies, access for low-income economies to markets in both
which are furthest from the technological frontier and high-income and emerging economies, including by
rely on access to foreign markets for sustained catch-up addressing tariff escalation on processed goods and
growth due to their limited market size and innovation trade-distorting subsidies, can also support economic
capabilities. Climate change is already harming growth in a world where an increasing share of
economic growth prospects in the most vulnerable trade is among developing economies. However,
economies, including LDCs, small-island developing trade barriers arising from inadequate domestic
states, and landlocked developing economies, which infrastructure or institutional challenges also need to
have the fewest resources to recover from natural be addressed.

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TRADE AND INCLUSIVENESS: EXECUTIVE SUMMARY
HOW TO MAKE TRADE WORK FOR ALL

Trade policy needs to be complemented by openness with other domestic policies that allow
policies that support structural transformation the gains from trade to flow to individuals, and
and technology absorption. For example, such enable them to move to where those gains are.
policies may aim to create a business environment
Trade has played a significant role in reducing
conducive to domestic and foreign investments, or to
poverty, especially in low- and middle-income
address specific business challenges and implement
economies. Trade has raised incomes and led to
new policies, as in the case of special economic
higher growth, resulting in significant benefits for some
zones (SEZs). Technology absorption, including
of the most vulnerable groups within economies. For
the domestic process of acquiring, developing and
instance, over the last 30 years, poverty has declined
utilizing technological capabilities, can be enhanced
sharply as trade has grown (see Figure 3). The poverty
through research and education policies. Other
headcount ratio in low- and middle-income economies
complementary policies may bridge information gaps
fell from 40.3 per cent in 1995 to 10.6 per cent in 2022,
between private and public sectors, or between local
while their share in global exports doubled from
and foreign-owned firms, as well as raise awareness of
about 16 per cent to 32 per cent. However, the
new trade and investment opportunities.
COVID-19 pandemic halted progress in poverty
Inclusiveness across economies can support reduction in many low- and middle-income
inclusiveness within economies, and vice versa. economies as a result of widespread job losses,
Ensuring that the benefits of economic growth, reduced incomes and constrained financial
including trade openness, are more widely distributed resources to acquire vaccines and establish social
helps to establish a stable and relatively prosperous support systems to cope with the pandemic.
middle class, which in turn can help to support
Over the past 30 years, global income inequality
the overall development process in an economy by
has remained high, but it has evolved differently
driving domestic consumption and encouraging
across economies. The average Gini index, a measure
entrepreneurial activity, economic diversification and
of inequality, across a large set of economies fell from
social stability. In turn, this development process helps
about 0.58 prior to the global financial crisis to 0.57 in
to achieve long-term economic growth and sustained
2022. However, this global average masks the diverse
poverty reduction.
evolution of income inequality between economies, with
Chapter C analyses the factors that hinder some of them experiencing significant decreases, while
individuals from accessing the gains from trade, others have faced persistent or widening disparities.
and underscores the need to accompany trade Moreover, global income inequality remains high

Figure 3: Substantial poverty reduction alongside increased trade participation of low- and
middle-income economies, 1995-2022
40%

35%

30%

25%

20%

15%

10%

5%
09
95

96

97

98

99

00

01

02

03

04

05

06

08

10

11

12

13

14

15

16

17

18

19

20

21
07

22
20
19

20
19

19

19

19

20

20

20

20

20

20

20

20

20

20

20

20

20

20

20

20

20

20

20

20

20

Poverty headcount ratio at US$ 2.15 a day (2017 PPP) (% of population) Exports of goods and services (% of global exports)

Source: Authors’ calculations, based on World Bank data on poverty, exports and GDP.
Note: The figure displays the evolution of the average share of poverty headcount at US$ 2.15 a day (2017 PPP) in population and the share of
exports of goods and services in global exports for low- and middle-income economies over the period 1995-2022. The income groups are
based on the 2022 World Bank’s classification.

- 11 -
 in absolute levels, with the level observed in 2020 lower- to higher-productivity jobs, and from declining
comparable to that of the early 1900s. The average sectors to growing ones, is the essential mechanism
share of income received by the top 1 per cent across by which trade increases overall economic efficiency,
all economies stands at 15.8 per cent. promotes development and improves living standards.
The impact of trade openness on workers depends
Gains from trade are unevenly distributed
on their industry, region, occupation and skillset.
among individuals within the economy, but this
Individuals with lower incomes, workers with fewer
does not inherently increase inequality. Trade
skills, small business-owners and some women are
openness increases the economy’s overall welfare,
often more susceptible to labour market disruptions
but is sometimes blamed for also increasing inequality.
While some economies became more unequal as they resulting from trade openness. In the absence of
integrated into the global economy, in others, increased adequate policy responses, the effects of labour
trade led to greater economic inclusion (see Figure 4). market disruptions can last for long periods, and
Trade openness can impact inequality differently can spill over into the local economy when affected
through various channels. It can lead to wage cuts and individuals must reduce their spending on local goods
job losses in sectors exposed to increase competition and services.
from abroad, while also creating new job opportunities, Mobility obstacles, reduce the gains from trade
including higher-paying
(a) Gini coefficient, positions, in expanding sectors
1995-2022 and exacerbate losses. Transitioning to expanding
that leverage the economy’s comparative advantages.
0.62 sectors is easier said than done for people affected
Overall, trade supports a growing share of employment, by import competition, who face individual-specific
with0.60the average share of jobs dependent on exports
and institutional obstacles. Affected individuals
reaching 28 per cent in 2019, marking a growth rate
0.58 may lack the skills or the financial means to adapt to
of over 20 per cent since 1995. These new, better
import competition by seizing new job or business
paid jobs supported by trade can, in some cases,
0.56 opportunities in growing sectors. For these reasons
Gini index

disproportionately benefit low-skilled workers. Similarly,

some women, people from low-income households
the0.54
lower prices and consumer choice that come with
and workers in the informal sector may find it difficult
trade openness can effectively increase the purchasing
0.52 to transition to expanding formal industries. Poor
power of low- and middle-income consumers.
transportation and digital networks can also hinder
While
0.50 trade generally brings benefits to many, their ability to access new job markets, whether in
some groups of individuals may experience person or online, especially for people living in remote
0.48
long-term losses. The ability of workers to move from areas. In addition, consumers in rural regions may not
17
95

96

97

98

99

00

01

02

03

04

05

06

08

09

10

11

12

13

14

15

16

18

19

20

21
07

22
20

20
19

19

19

19

19

20

20

20

20

20

20

20

20

20

20

20

20

20

20

20

20

20

20

20

20

20
Low-income economies Middle-income economies High-income economies Global average
Figure 4: Weak correlation between trade openness and income inequality, 2021
(b) Gini coefficient and trade openness, 2021
0.8

0.7

0.6
Gini index

0.5

0.4

0.3
0.5 2.0 3.5 5.0 6.5 8.0 9.5
Trade openness index

Low-income economies Middle-income economies High-income economies

Source: Authors’ calculations, based on World Inequality Database and World Bank data on trade openness.
Note: The figure shows the correlation between the Gini index and trade openness index. The Gini index is a measure of inequality, ranging
from 0 for perfect equality to 1 for maximal inequality. The trade openness index corresponds to the share of exports and imports over GDP
conditional on economy size. The analysis covers 157 economies, classified based on the 2021 World Bank income group classification.

- 12 -
TRADE AND INCLUSIVENESS: EXECUTIVE SUMMARY
HOW TO MAKE TRADE WORK FOR ALL

benefit as much from the lower prices associated with enterprises (MSMES). For instance, tariffs tend to be
trade openness because of high domestic trade costs higher in sectors with a higher proportion of female
and intermediaries’ market power. employees, and on products primarily consumed
by women. Removing the gender bias of tariffs can
Trade policies that seek to mitigate the disruptive
contribute to making trade more inclusive. Similarly,
effects of trade by protecting specific groups
adopting trade facilitation measures and improving the
of individuals can be costly and can negatively
availability of trade finance can contribute to reducing
impact other segments of the population. Trade
the fixed costs of participating in international trade,
protection for specific groups in a given industry can
which is particularly beneficial for MSMEs given their
raise the production costs for other sectors that rely
limited financial resources. Trade policy can further
on protected but more expensive goods or inputs
support inclusiveness more effectively by helping
whether produced domestically or imported. These
to address distortions and barriers that hinder equal
costs can increase so much that they more than offset
participation in trade.
the positive employment impacts on directly protected
import-competing industries. Such trade policies Complementary domestic policies are required
can also prove ineffective if affected trading partners to make trade more inclusive. The decision of
retaliate and thereby threaten jobs supported by trade. whether and how to address inclusiveness rests with
In addition, measures such as export restrictions on each government. While there is no “one size fits all”
food tend to be ineffective in shielding low-income approach, economic growth, institutional reforms and
consumers from external shocks because they can sustainable debt management are important enablers
discourage farmers from producing more food, of inclusiveness. Support for affected individuals in
ultimately leading to shortages and higher costs for managing trade adjustment costs and maximizing the
everyone, including the poor. benefit of trade openness can be achieved through
the adoption of a mix of labour market adjustment,
Making trade more inclusive is essential in
competitiveness and compensation policies. Labour
a context of rising geopolitical tensions,
market policies, such as vocational training and
technological revolution and climate change.
unemployment benefits, can help affected workers
Inclusiveness seeks to ensure that the benefits and
during periods of job transition. In the medium term,
opportunities of trade are accessible to all individuals
education policies can help to develop a more skilled
and businesses. Trade brings benefits to many but
and mobile workforce. Competition policy to address
the disparity between individuals who can effectively
excessive market power of certain large firms can help
adjust to trade and those who cannot creates a risk of
to ensure that consumers benefit from lower prices
widening inequality. This can fuel political tensions and
due to trade openness. Other policies that increase
potentially erode support for trade openness. But trade
competitiveness can also make the economy more
fragmentation resulting from geopolitical tensions
responsive, such as affordable, efficient and reliable
ultimately limits economic opportunities and financial
infrastructure and well-functioning financial markets.
resources, exacerbating poverty and inequality.
Taxation can help to fund support programmes for
While digitalization can promote inclusiveness by
those adversely affected by trade. Increasing the
overcoming geographical remoteness, providing more
participation of vulnerable groups in the decision-
time flexibility and enhancing the tradability of cross-
making process can further contribute to ensuring
border services, it could also disrupt labour markets
that their specific needs and situations are taken into
in ways reminiscent of import competition in the past.
consideration.
Marginalized individuals are particularly vulnerable to
climate change due to their limited adaptive capacities. Chapter D discusses how international
Meanwhile, measures such as reforming agricultural cooperation can make trade and complementary
trade rules could help foster access to diverse and policies more effective at supporting
resilient food sources, even as weather patterns inclusiveness across and within economies,
change. and highlights how better coordination among
international organizations could amplify their
Removing discriminatory trade barriers affecting
collective impact on inclusiveness.
vulnerable groups could foster a more inclusive
trading system. Certain restrictive trade policies The WTO contributes to inclusiveness across
can have a disproportionate impact on certain economies by promoting an open, rules-based
vulnerable groups, including low-income households, and predictable multilateral trading system.
some women, and micro, small and medium-sized The predictable access to open global markets

- 13 -
 underpinned by the multilateral trading system has WTO rules provide for various flexibilities aiming
enabled some developing economies to catch up to enhance trade opportunities for developing
with more advanced economies. Membership of the economies, including LDCs. Through successive
General Agreement on Tariffs and Trade (GATT)/WTO, negotiations, amendments and decisions, the WTO
has, on average, boosted trade between members agreements now include over 155 special and
by 140 per cent. WTO commitments have also been differential treatment (S&DT) provisions targeted at
found to reduce protectionist responses to economic developing economies, including 25 S&DT provisions
shocks, thereby reducing trade policy uncertainty, that are specific to LDCs. These provisions are
which is crucial for attracting investments. designed to safeguard the trade interests, offering
flexibility in commitments, providing longer periods
WTO rules also contribute to improving
for implementing WTO agreements and ensuring
governance through economic reform, thereby
technical assistance. For instance, tariff preferences
promoting sustained economic growth. Accession
have expanded exports from developing economies
to the WTO contributes to economic growth by
facilitating trade growth, fostering trade revenue stability and LDCs, despite the administrative costs associated
and FDI through a predictable trade policy environment. with these preferences. Preference schemes have also
Acceding WTO members commit to wide-ranging been found to raise exports to third-party economies
reforms of their trade policies, economic institutions through learning-by-exporting effects.
and domestic governance, including by reducing Aid for Trade projects and similar technical
tariffs and non-tariff barriers, regulating state-owned assistance programmes available for developing
enterprises, protecting intellectual property rights, economies have enhanced their export
and establishing independent tribunals. Economies opportunities. Between 2006 and 2022, a cumulative
that underwent a reform process during their WTO total of US$ 648 billion of Aid for Trade funding was
accession experienced an average growth rate that allocated to promote the integration of developing
was 1.5 percentage points higher than economies economies and LDCs into the multilateral trading
that underwent no such process; these economies system, as well as to support economic convergence
continued to grow faster after their accession to the by addressing supply-side capacity and trade-related
WTO (see Figure 5). infrastructure constraints and building trade-related
skills. Aid for Trade projects have been found to
enhance an economy’s trade potential, by expanding
Figure 5: Higher economic growth in WTO established trade relations and by establishing new
members with more extensive commitments trade relations. In 2023, the WTO and the World
Bank launched the “Digital Trade for Africa” project to
80%
leverage their synergies to provide technical assistance
Average change in GDP per capita

and capacity-building to ensure African economies’

relative to GATT/WTO entry year

60%
digital infrastructure is supported by enabling regulatory
40%
frameworks. More recently, the World Bank and the
WTO launched a joint programme to assist developing
20% economies in services trade.

Greater efforts to include the economies that

0%
have been left behind in the global trading
system require a more effective and inclusive
-20%
-5 -4 -3 -2 -1 0 1 2 3 4 5 6 7 8 9 10 WTO. Amid geopolitical tensions it is important
Years prior to and following GATT/WTO accession to uphold the operational capacities of the WTO.
Article XII members Non-Article XII members Addressing remaining trade barriers and facilitating the
implementation of existing WTO agreements, assisting
Source: Authors’ calculations, based on Penn World Table and
low-income economies in complying with export
Brotto et al. (2024).
Note: The figure shows the average change in GDP per capita in market requirements, accelerating the accession to
relation to the year of GATT/WTO entry for both Article XII WTO the WTO of new members can contribute to create
members and non-Article XII members. GDP per capita growth
is based on expenditure-side real GDP expressed in 2017 US$ new opportunities for further convergence. Despite
purchasing power parity. Article XII members refers to members progress, many developing members, including LDCs
that acceded the WTO after 1995 under Article XII of the GATT.
Non-Article XII refers to GATT contracting members that became and small, vulnerable economies, face constraints
WTO members without having to go through the Article XII in participating in the different WTO functions.
process.
Strengthening the participation of all WTO members

- 14 -
TRADE AND INCLUSIVENESS: EXECUTIVE SUMMARY
HOW TO MAKE TRADE WORK FOR ALL

in negotiations, deliberations and committee work is a blueprint, by providing relevant policy space for
essential to ensure a fairer representation, enhance developing economies without undermining the
mutual understanding, and promote more effective and predictability and stability of trade policies achieved
inclusive decision-making. Timely trade monitoring, through credible commitments.
along with an effectively functioning dispute settlement
Concerns about the distributional impacts of
mechanism accessible to all members, is also crucial
trade have led to a growing number of trade
for achieving a more inclusive WTO.
agreements including provisions explicitly
Greater international trade cooperation is also related to inclusiveness within economies.
necessary to address evolving challenges in Provisions on labour standards, such as those set by
areas crucial to the future of trade, such as the International Labour Organization (ILO), covering
services, digital and green trade. Efforts to address issues like child labour and discrimination in the
trade costs in services, which are higher than those labour market, are included in an increasing number
for trade in goods, can reduce business uncertainty of regional trade agreements (RTAs). Some relatively
and create opportunities in the cross-border supply recent detailed provisions on inclusiveness in RTAs
of services and digital trade. Greater coordination and specifically relate to disadvantaged groups, such as
experience-sharing on digital trade regulations can women, vulnerable workers, indigenous people and
support the adoption of best practices and strengthen persons with disabilities (see Figure 6). Other RTA
domestic and global digital regulatory frameworks. In provisions promote corporate social responsibility
this regard, under the Joint Initiative on E-commerce, or relate to specific types of firms, including MSMEs
a group of WTO members recently stabilized the text and artisanal companies. While many provisions on
of an agreement governing some aspects of digital inclusiveness promote cooperation activities, some
trade. Even though low-income economies receive other provisions establish specific level playing field
only a small share of FDI, they nevertheless stand to disciplines or exemptions.
benefit significantly from improvements in investment
facilitation, as set out in the plurilateral Investment WTO rules also contribute to inclusiveness within
Facilitation for Development (IFD) Agreement, economies. Although WTO agreements are mainly
which was recently finalized by 125 WTO members. concerned with inclusiveness across economies, the
Coordinating trade-related climate change policies preamble of the Marrakesh Agreement Establishing
can also prevent trade tensions resulting from carbon the World Trade Organization recognizes that WTO
border policies and climate support measures that members should conduct trade relations with a view
some developing economies perceive as a hindrance, to raising standards of living and real income. WTO
however inadvertent, to their export capabilities – and disciplines aim mainly to minimize the negative effects
hence an impediment to their economic convergence. of trade policies on trading partners to increase the
economic benefits from more trade openness. This, in
Finding the right balance between binding turn, contributes to inclusiveness within economies by
commitments and effective flexibilities is fostering economic growth and reducing poverty. For
essential to further inclusiveness across instance, a number of provisions in the WTO Agreement
economies. Various proposals have been put on Agriculture aim to contribute to food security, which
forward by some WTO members to modify S&DT is of particular importance to low-income households.
provisions. There is, however, no consensus among More recently, the Declaration on Services Domestic
WTO members. While there is no “one-size-fits- Regulation, adopted by a group of WTO members in
all” approach to flexibilities, commitments should 2021, prohibits gender discrimination when authorizing
be aligned with a member’s capacity to implement
the supply of a service.
them, while recognizing that certain carve-outs
can undermine some of the benefits of a rule-based Nothing in the WTO agreements restricts the use
system. The S&DT provisions of the Trade Facilitation of non-discriminatory complementary policies
Agreement (TFA) and of the recent plurilateral for inclusiveness. The decision of whether and how
IFD Agreement mark a significant shift from the to address inclusiveness rests with each government.
WTO’s traditional S&DT approach by introducing a Many distortions that lead to unequal effects from
conditional link between commitment requirements trade-opening are often rooted in structural domestic
and implementation capacity, allowing developing and factors, that are best addressed through domestic
least-developed country members to set their own complementary policies, such as labour, education or
implementation timetables based on their capacity. taxation policies. Trade-related instruments that some
These types of S&DT provisions could serve as governments may choose to use for inclusiveness

- 15 -
 Figure 6: Increasing numbers of provisions on inclusiveness in RTAs, 1990-2021

0.7

0.6

0.5
Inclusiveness RTA index

0.4

0.3

0.2

0.1

0
1990 2000 2010 2020

North-North RTA North-South RTA South-South RTA

Source: Authors’ calculations, based on a mapping of provisions on inclusiveness in RTAs.

Note: This figure shows the evolution of provisions on inclusiveness in RTAs between 1990 and 2021. The inclusiveness RTA index ranges from
0 to 1 and considers 33 explicit types of provisions addressing different dimensions of inclusiveness, including human rights, workers, MSMEs,
poverty, gender, indigenous communities, people with disabilities, and other minorities and vulnerable groups. “North” is defined as high-income
economies, whereas “South” is defined as low- and middle-income countries, according to the 2022 World Bank’s income group classification.

purposes, such as tariffs, subsidies and export A number of trade-related technical and
restrictions, are subject to WTO disciplines to avoid capacity-building initiatives in the WTO are
potential negative spillovers on other economies and contributing to making trade more inclusive.
potential retaliatory measures that would undermine Poverty reduction, women’s economic empowerment
overall inclusiveness. For instance, the WTO also and MSME participation are increasingly being
provides for safeguards that can be applied to protect integrated into Aid for Trade, as well as into projects
some workers in specific domestic industries in response of the Enhanced Integrated Framework (EIF) and
to import surges, as well as trade remedy measures to Standards and Trade Development Facility (STDF),
offset the harmful effects of market distortions. multilateral partnerships supported by the WTO. Trade
finance facilitation programmes can also significantly
WTO members are increasingly discussing how
benefit and enhance international trade for MSMEs
to make trade more inclusive by fostering the
and women traders. In early 2024, the WTO and
greater participation of women and MSMEs in
the International Trade Centre (ITC) launched a
trade. The recognition of the specific constraints of
“Women Exporters in the Digital Economy” (WEIDE)
MSMEs and businesses owned by women in integrating
Fund to assist women in accessing opportunities in
global trade and leveraging trade for economic
international trade and the digital economy.
empowerment has resulted in the establishment of
the WTO Informal Working Groups on MSMEs and The WTO could help to address inclusiveness
on Trade and Gender. The Informal Working Group issues within an economy by means of its
on MSMEs provides a forum to exchange information transparency and monitoring functions. More
and experiences on ways in which WTO members information on the effects of certain trade policy
could better support the participation of MSMEs in measures on vulnerable groups could help address
global trade. The Informal Working Group on Trade potential discriminatory effects. Collecting relevant
and Gender aims to enhance women’s participation disaggregated data and conducting analysis could
in international trade by sharing best practices and inform these discussions. For instance, the trade and
exploring how women can benefit from the Aid for gender dimension has arisen in discussions of the
Trade initiative, among others. Discussions on inclusive Trade Policy Review Body (TPRB), mainly through
trade have also gained significant importance in other the voluntary provision of relevant information in trade
WTO committees and working groups. policy review reports prepared by members and their

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TRADE AND INCLUSIVENESS: EXECUTIVE SUMMARY
HOW TO MAKE TRADE WORK FOR ALL

statements at TPRB meetings. Identifying strategies and” approach to further support inclusiveness
and mechanisms to mitigate and minimize the adverse across and within economies. While the WTO
effects of export restrictions of essential products on remains a cornerstone for international trade
importing economies could also contribute to food cooperation, many trade-related developmental
security and resilience. and inclusive policies are also addressed by other
international organizations. Under the “Decision on
The implementation of WTO commitments achieving greater coherence in global economic
can also become more inclusive if vulnerable policy-making”, the WTO already collaborates with the
groups are actively involved. The increased International Monetary Fund (IMF) and the World Bank.
participation of representatives from vulnerable groups The WTO also works with many other international
in domestic deliberative trade processes can help organizations. Enhancing collaboration among
to ensure that their perspectives and interests are international organizations could help to leverage
taken into account when certain WTO provisions are synergies between trade policies and complementary
implemented. The TFA serves as a noteworthy example policies, and international organizations could mutually
of how trade policy can become more inclusive, by reinforce each other in fostering inclusiveness
involving representatives from groups that may face across and within economies. It is important to
discrimination in policy implementation in national support coordinated efforts to strengthen capacity to
trade facilitation committees, and providing them with implement WTO agreements by addressing regulatory,
access to relevant trade information, as well as to skills and infrastructure gaps, as well as to address
capacity-building and training opportunities. Sustained competition, corporate taxation and corruption issues.
government support and resources are, however, These collaborative efforts could take various forms,
essential if national trade facilitation committees are to from partnerships to simple exchanges of information.
The WTO could serve as a platform for international
achieve more effective and inclusive trade reforms.
organizations, governments, businesses and non-
The multifaceted “trade and” challenges faced governmental organizations to further collaborate and
today demand a robust and coordinated “WTO share information on specific trade-related issues.

- 17 -
A
Introduction
Global trade is often accused of creating a more
unequal world, but in fact the opposite is happening.
Billions of people in developing economies are catching
up to the more advanced economies, as millions of
people in the advanced economies continue to move
ahead. This global economic convergence is only
possible because the world has become more open
and integrated – expanding access to new markets,
new technologies and new models for achieving rapid,
sustained and inclusive growth.
Yet there are still economies – and groups within
economies – that have yet to share in expanding
growth, or whose growth has stalled, because they
have been unable to harness their trade potential and
comparative advantages. This is the result partly of
supply constraints, partly of poor connectivity, and
partly of trade barriers and distortions, as well as of
a lack of coherence across the key policies needed
to drive trade-led growth. The slowing pace of global
economic integration over the last decade and a half
– and the danger that rising protectionism could push
integration into reverse – could make it even harder
for these economies to finally harness the trade
behind rapid growth.
This report argues that much more can – and should
– be done domestically and internationally to achieve
more truly inclusive global trade.

- 18 -
TRADE AND INCLUSIVENESS:
HOW TO MAKE TRADE WORK FOR ALL A INTRODUCTION

Our world is only partly the world, which represented 85 per cent of humanity,
has been called the “Great Divergence” because it
globalized generated ever-widening disparities in development,
living standards and economic power worldwide
Creating a more inclusive global economy requires
(Huntington, 1996; Pomeranz, 2000). By 1980, the
more and better trade, not less trade. The word
United States, by then the world’s richest economy,
“globalization” often conjures up images of a world
economy being uniformly woven together by trade, had a per capita income over 100 times greater than
transport and technology, but this picture is only partly the poorest economies in parts of Asia and Africa.
accurate (Ohmae, 1999). While many economies But over time, the impact of the Industrial Revolution
and people are already deeply interconnected – and continued to radiate outwards, like ripples on a pond,
others are in the process of rapidly linking up – other and each new wave of global economic development
economies, regions and groups have not been able to was more extensive – and involved millions more
successfully integrate into the global economy, or are people – than its predecessor. The period after the
not benefitting from the integration they have achieved Second World War saw Japan and the “Asian Tigers”
so far. (Hong Kong (China), the Republic of Korea, Singapore
These varying levels of global integration largely and Chinese Taipei) – the fast-globalizing economies
mirror varying levels of wealth, living standards and of that era – rapidly catch up with developed
technological progress around the world – with the economies in the West, even as advanced industrial
richer and more advanced economies often being economies redoubled their lead on the poorer and
the most open and integrated, and fast-emerging less developed economies that were being left ever
economies also moving in this direction, but many low- further behind. For example, in 1953, the Republic of
income economies, and even some middle-income Korea had a per capita GDP, adjusted for inflation,
economies, only partially integrated into the global of US$ 67, making it one of the poorest countries in
economy, and at risk of being left even further behind the world; by 2023, its per capita GDP had reached
by the world’s ongoing economic and technological more than US$ 34,000, roughly the same as that of
progress. As a result, today’s unevenly globalized the European Union.
world is also an unequal world.
The period after the 1980s saw an even larger share
of the developing world begin its own process of
A diverging global economy has rapid industrialization and economic modernization,
become a converging one helping to lift a billion of people out of poverty and
to narrow the wealth and living standards gap with
Two hundred years ago, the world was a more equal the West (World Bank and WTO, 2015). China, with
place largely because most people were equally poor. its 1.3 billion people, has seen its economy grow at
The richest economy in the world in 1820, Great an average of 9 per cent per year for the past four
Britain, had a per capita income only about five times decades.
larger than the poorest economy at the time, Nepal
(Milanovic, 2023). The Industrial Revolution, which While such large emerging economies capture much
started roughly a half century before, marked a turning of the world’s attention, the “new globalizers” also
point, sparking an unprecedented surge of economic encompass economies of all sizes and in all regions,
growth and technological progress that upended the such as Cambodia, Ethiopia, Peru, Poland, Qatar and
relatively static and level global economic landscape Uganda.
that had prevailed up until then.
This newest, fastest, and largest phase of economic
This great economic leap forward was limited at first catch-up has been termed the “Great Convergence”
– starting with Great Britain, expanding to the rest because, for the first time since the start of the
of Europe, and then expanding again to Europe’s off- Industrial Revolution, most of the world’s population
shoots in North America and elsewhere around the is becoming relatively more, not less, equal as billions
globe. These “early industrializers” continued to race of people rapidly move up the growth, technology and
ahead of the rest of the world throughout the 19 th and development ladder (Spence, 2011; Mahbubani, 2013).
first half of the 20 th centuries.
In the 1980s, France, Japan, the United Kingdom,
This rapid growth of the more advanced “West”, the United States and other developed economies
which represented just 15 per cent of the world’s accounted for more than 60 per cent of the world’s
population, and the slow or lack of growth in the rest of GDP, while developing economies accounted for less

- 19 -
 than 40 per cent. Today, those shares have reversed: In the same way that the economic rise of the United
Brazil, China, Indonesia and other developing States triggered a global economic boom in the
economies account for almost 60 per cent of the second half of the 19 th century, and the ascent of
world’s GDP, while developed economies account for Japan and the “Asian Tigers” helped to drive even
just over 40 per cent. greater growth after 1945, the rapid development of
four billion-plus people in the global South and East
While the per capita output of emerging economies
– together with their growing demands for technology,
is still well behind that of advanced economies, the
capital, advanced machinery and services – will
gaps are narrowing at an accelerating rate. China is
inevitably drive further growth and income gains in
the most striking example. In 1990, China had just
the developed West as well. According to Hufbauer
7 per cent of the GDP of the United States measured
and Hogan (2023), US gains from engaging in world
at market exchange rates, but by 2022, China’s GDP,
markets since 1950 amounted to almost US$ 2.6 trillion
at US$ 18.3 trillion, was 73 per cent of the GDP of the
in 2022. Over the past decade and a half, China alone
United States, a ten-fold increase. China’s per capita
has accounted for 35 per cent of global nominal GDP
income is now roughly US$ 13,000, approximately
growth, while the United States has accounted for
17 per cent of US per capita income – compared with
27 per cent (Prasad, 2023).
less than 2 per cent in 1990 – and at current growth
rates it could reach half of US levels by 2050. Other As a result, both high-income and fast-emerging
fast-growing developing economies are following a economies have seen their living standards steadily
similar trajectory. advance (see Figure A.1). Over the last 40 years,

Figure A.1: Significant real GDP convergence but more limited average real GDP per capita
convergence, 1995-2022

50 60

50
40
Average real GDP per capita

40
(2017 PPP thousand US$)
(2015 trillion US$)

30
Real GDP

30

20

20

10
10

0 0
95

95
98

01

04

97
07

10

13

16

99

01

03

05
19

07

09

19
22

11

13

15

17

21
19

19

20

20

20

20

19

19
20

20

19

20

20

20

20

20

20

20

20

20

20

20
20

20

Non-converging to average high-income Converging to high-income High-income

Source: Authors’ calculations, based on World Bank data on real GDP and real GDP per capita.
Note: The figure displays the evolution of real GDP (in 2015 US$) and real GDP per capita in purchasing power parity (PPP) (in 2017 US$). The
non-converging group includes economies that were low- or middle-income in 1995 and that did not grow as fast as high-income economies
between 1996 and 2021 (measured by real GDP per capita growth). Conversely, the converging group includes low- or middle-income economies
that grew faster than high-income economies during the same period. The income groups are based on the 1995 World Bank classification.

- 20 -
TRADE AND INCLUSIVENESS:
HOW TO MAKE TRADE WORK FOR ALL A INTRODUCTION

US per capita income has increased six-fold, while Fostering growth and trade are
Swedes are 30 times wealthier today than they were
200 years ago (Roser, 2024).
two sides of the same coin
The global diffusion of technology also benefits This “Great Convergence” was only possible because
everyone because, as Paul Romer famously observed, the world economy has grown more open and
knowledge is expanded, not reduced, when it spreads integrated, driven mainly by declining transport and
(Romer, 1986). communications costs, but also by decreasing trade
barriers and increasing economic cooperation, all
Many of today’s leading-edge technologies, such as underpinned by a rules-based international economic
artificial intelligence (AI), quantum computing, robotics system.
and biotechnologies, are still generated in developed
economies. But as some emerging economies become In the same way that steamships, railways and
more advanced, they are fast becoming technology telegraph cables began to link the world economy
innovators and leaders too – in telecommunications, together in the 19 th century, container ships, jet
aerospace, clean energy and other advanced airplanes and the internet have woven an even more
technologies – adding to the positive feedback loop integrated global economy in the 20 th and early
that is accelerating global economic progress. 21st centuries.
The result is a world economy that is growing, The invention of the shipping container alone has been
developing and converging at an unprecedented rate, a major driver of globalization. By 2021, it cost less to
although developing economies’ average per capita move a container from Los Angeles to Shanghai – half-
output is still significantly lower than that of advanced way around the world – than from Los Angeles to San
economies (see Figure A.1). According to World Bank Diego – just 200 km down the road (Shiphub, 2021),
data, in 1995, global per capita output, adjusted for although there is a risk that recent geopolitical and
inflation, amounted to roughly US$ 7,050. Even after
environmental disruptions may change that. The cost
setbacks such as the Asian financial crisis (1997-98),
of overseas telecommunications is approaching zero,
the global financial crisis (2007-09), the COVID-19
fuelling an explosion of digital services trade, including
pandemic, and numerous regional conflicts and wars,
online education, telemedicine and on-line distribution.
global per capita output had increased by 65 per
China could not have become the new “workshop of
cent to over US$ 11,570 by 2023. And if growth rates
the world” without the transoceanic “conveyer belt”
continue at current trends, global output could further
double by mid-century (Goldman Sachs, 2023). that containerization has provided (Economist, 2013).

While economic growth is not the only condition for While transport and communications technologies have
development, it is a necessary condition – which been important drivers of global economic integration,
helps to explain why much of the world’s population international economic cooperation and rule-making
is also making enormous strides in reducing poverty, aimed at lowering trade barriers, creating a level
malnutrition and infant mortality, and in improving economic playing field, and the avoidance of beggar-
access to schooling, healthcare and electricity. thy-neighbour currency wars has also played a central
role. The gold standard and an expanding European
Between 1950 and 2019, global literacy increased
network of bilateral trade agreements underpinned
by a third, from 56 per cent of the world’s
the first age of globalization in the 19th century, just as
population to over 86 per cent, and women’s literacy
new multilateral economic institutions (the International
increased even more dramatically, from just 45
Monetary Fund, the World Bank and the General
per cent to almost 83 per cent (UNESCO, 2024).
Agreement on Tariffs and Trade (GATT), succeeded
According to World Bank data, global average life
by the WTO) – and a series of multilateral and regional
expectancy has increased by over a third, from 48
years to 73 years. And global per capita income, trade liberalization initiatives – underpinned the
adjusted for inflation, has almost quadrupled, from resumption of globalization after 1945.
US$ 2,161 to US$ 11,570. Average trade-weighted applied tariffs fell by almost
Since 1995 alone, the poverty headcount ratio 40 per cent after the Second World War and have
in low- and middle-income economies fell fallen by over two-thirds in the last three decades,
from 40.3 per cent in 1995 to 10.6 per cent from 6.9 per cent in 1996 to 2 per cent in 2022. Today
in 2022. Never before have the living conditions and some 60 per cent of world trade now flows tariff-free,
prospects of so many people changed so dramatically while another fifth is subject to tariffs of less than
and rapidly in history (UNDP, 2013). 5 per cent.

- 21 -
 The combination of declining physical and policy- The world’s fastest-growing
induced trade costs has helped to fuel an exponential
growth in world trade. Between 1950 and 2022,
economies are also some of
annual merchandise trade grew at a rate of 5.4 per cent the most open and integrated
a year, translating into an extraordinary 45-fold
expansion. Almost all of the fast-developing economies over the
past 40 years – indeed, over the past two centuries
More recently, new sectors of world trade have been – have used integration into the global trading system
expanding even faster. Services trade has grown to drive sustained growth. While these economies may
6.8 per cent annually since 1990, digitally delivered not have opened up in the same way, transformed at
services have grown at 8.2 per cent a year since 2005, the same speed, or adopted the same policies, the
and renewable energy goods trade (including solar common thread running through all their experiences
panels and wind turbines) has grown fastest of all, by is the shift towards more outward-oriented, trade-led
10.3 per cent a year, more than double other goods economic growth strategies. In other words, openness
trade (4.9 per cent), since 2005 (see Figure A.2). and growth have gone hand-in-hand (see Figure A.3).
With this expansion of trade has come a widening A more open and integrated world economy has
and deepening of global integration. Although slowing
enabled some developing economies to catch up with
trade growth since 2008 seems to signal a slowdown
– and converge on – more advanced economies in
in economic opening and integration worldwide, the
several critical ways.
global trade-to-GDP ratio rose from around 5 per cent
in 1950, to 20 per cent in 1995, to over 29 per cent One is by leveraging global demand. Many low- and
in 2023, underscoring the central role of trade in middle-income economies are unable to generate
weaving together today’s increasingly interconnected high growth by relying on domestic demand alone.
and interdependent world economy. Increased access to global markets for their exports

Figure A.2: Export growth of environmental and digital trade significantly higher than other goods
and services, 2005-23

550

500

450

400
Average annual growth rates

350
(index 2005=100)

300

250

200

150

100

50
09

11

13

15

19
16

17

18
06

08

10

12

14
07

22

23
20

21
05

20

20

20

20

20

20
20

20

20

20

20

20

20
20

20

20

20

20

20

Renewable energy goods exports Digitally delivered services exports Other goods and services exports

Source: Authors’ calculations, based on UNCTAD and WTO data and Trade Data Monitor (TDM) data for 2023.
Note: The figure displays the evolution of the average annual export growth rate of environmental goods (specifically, light-emitting diodes
(LEDs), solar and other non-electric water heaters, and wind turbines), digitally delivered services (specifically, services traded across borders
through computer networks), and other goods and services exports. Estimates for 2023 are preliminary.

- 22 -
TRADE AND INCLUSIVENESS:
HOW TO MAKE TRADE WORK FOR ALL A INTRODUCTION

Figure A.3: Positive correlation between trade participation and per capita GDP growth, 1995-2021

8%

6%
Average annual GDP growth

4%
(1995-2021)

2%

0%

-2%
0.5 1 1.5 2 2.5 3 3.5 4 4.5 5
Average trade participation index (1995-2021)

Low-income economies Lower middle-income economies Upper middle-income economies High-income economies

Source: Authors’ calculations, based on World Bank data on GDP and trade.
Note: The trade participation index is the share of goods and commercial services trade in GDP, adjusted for the country size. The income
groups are based on the 2022 World Bank classification.

has allowed them to leverage comparative advantages, trade networks and to specialize in a specific product
exploit economies of scale, and overcome the without having to first develop a comprehensive
constraints imposed by small and relatively poor industrial base. In the early 19 th century, Great
domestic markets or remote geographical locations Britain required a complex combination of domestic
– all of which has helped to increase efficiency, production factors, including steam power technology,
boost productivity and fuel rapid economic growth, cheap coal, advanced metallurgy, efficient agriculture,
particularly in sectors with high export potential. a relatively sophisticated financial system and an
increasingly urbanized workforce, to kick-start its
Another related factor driving their rapid growth has industrialization (Van Neuss, 2015). Singapore’s rapid
been access to foreign direct investment (FDI). As industrialization after 1965 depended largely on one
global markets have opened up and trade costs have key domestic asset: a highly skilled, innovative and
fallen, multinational enterprises have “unbundled” the entrepreneurial workforce, with other main factors
production process and shifted its various stages to of production, such as food, energy, machinery and
relatively more cost-efficient locations around the planet. natural resources, being imported (Economist, 2015).
This rise of global value chains (GVCs) – effectively
This expanding global web of trade, investment and
world factories – has created a positive feedback loop:
production has also helped developing economies
more open trade has encouraged more FDI, as export
to dramatically increase access to the most critical
capacity is strengthened and upgraded; and more FDI
growth input of all, technology – either in the form of
has encouraged more trade, as GVCs expand and grow
imported products, such as machinery, software or
more competitive. Upwards of two-thirds of world trade
solar panels, or as imported services, such as product
now takes place within globe-spanning multinational
designs, production techniques, supplier training or
enterprises or with their suppliers.
overseas education. Sometimes the simple cross-
GVCs have enabled the integration of many developing border flow of ideas has been enough to inspire local
economies into the global economy in other important innovation and invention (Buera and Oberfield, 2020;
ways: by allowing them to link up with established Cai, Li and Santacreu, 2022; Sampson, 2023).

- 23 -
 Either way, the globalization of technology has made sustainable development, recognizing that trade
it easier, cheaper and quicker for many developing now increasingly takes place within complex global
economies to industrialize, helping them to accelerate production networks and that integrating into the
learning curves and, in some cases, leapfrog stages of networks requires joined-up policies and strategies.
development (Baldwin, 2019).
And fast-globalizing economies have usually invested
heavily in infrastructure, adjustment assistance, the
Trade is necessary for fast active upskilling and re-skilling of workers, and other
growth, but is not sufficient “public goods” to create an enabling environment for
trade-led growth and to help shift industries into more
Economies that have successfully harnessed trade to value-added production and exports.
drive faster growth have also implemented a range of
domestic policies that have helped them to leverage Trade policies and policies related to macroeconomics,
their comparative advantages, facilitate connectivity development, and inclusiveness are interlinked and
to global markets, promote economic adjustment and can reinforce each other. By ensuring these policies
cushion the adverse impacts of structural change. are not only well-designed but coherent, trade can be
better leveraged for sustained growth. More inclusive
At a minimum, they have provided the basic “operating trade can, in turn, enhance the effectiveness of many
system” that markets need to function efficiently other complementary policies, potentially creating
– political and macroeconomic stability, effective a positive cycle of improvement. Trade encourages
financial and legal systems, and a transparent, efficient structural reform, increases productivity and spurs
and non-discriminatory regulatory environment. They innovation, helping to expand economic opportunities.
have also implemented complementary policies aimed Old industries may decline but newer, more dynamic
at promoting FDI, encouraging competitive markets, industries emerge; old jobs may disappear, but other
protecting intellectual property and advancing better, higher-paying jobs are created. While the overall

Figure A.4: Positive correlation between changes in trade openness and changes in employment,
1995-2022

20%

15%

10%
Change in employment to population ratio

-5%
(1995-2022)

5%

-10%

0%

-15%

-20%
-50% -25% 0% 25% 50% 75% 100% 125%
Change in trade openness index (1995-2022)

Low-income economies Lower middle-income economies Upper middle-income economies High-income economies

Source: Authors’ calculations, based on World Bank data on trade openness and International Labour Organization (ILO) data on employment
to population ratio.
Note: The figure displays the percentage point changes in trade openness index and employment to population ratio between 1995 and 2022.
The income groups are based on the 2022 World Bank classification.

- 24 -
TRADE AND INCLUSIVENESS:
HOW TO MAKE TRADE WORK FOR ALL A INTRODUCTION

correlation between trade and total employment tends to argue that international trade exacerbates inequality
to be marginally positive (see Figure A.4), millions of by only benefitting wealthy economies and individuals,
often higher-paid jobs are supported by trade. while leaving marginalized groups and regions behind.

As the economy grows and prices fall, more resources While some economies have grown more unequal as
become available for investments in education, training they have opened up and integrated into the global
and adjustment assistance, which can, in turn, help economy, many of the world’s most successful and
more people to take part in and benefit from economic durable trade powers – especially advanced economies
growth. This virtuous circle can help to increase such as Germany or the Netherlands – are also some
equality of opportunity, promote social inclusion and of the most equal in terms of income distribution
reduce extreme wealth disparities, especially among and living standards. There is growing evidence that
marginalized groups, if appropriate complementary economies that have been less successful at sharing
policies are put in place. the cost and benefits of trade, and have experienced
rising inequality, are finding it more difficult to sustain
Over the past 30 years, income inequality has evolved
political support for more trade-opening, and face a
differently across economies, with some experiencing
growing backlash at home to globalization (Pastor and
significant decreases, but many others facing
Veronesi, 2018; Acharya, 2022). This suggests not
persistent or widening disparities. Global income
only that openness and equity can go hand-in-hand,
inequality remains high in absolute levels, with the level
but that prioritizing greater inclusion may be a critical
observed in 2020 comparable to that of the early 1900s.
part of any sustainable trade-led growth strategy.
Wealth inequality has also remained consistently
high over the past three decades, although the share Trade agreements can also help governments to
of personal wealth owned by the top 1 per cent implement and anchor pro-growth domestic reforms.
decreased slightly, from 31.4 per cent in 1995 to Participating in a rules-based trading system
30.6 per cent in 2022. These trends have led some incentivizes governments to uphold their market-

Figure A.5: Greater poverty reduction in WTO members than non-WTO members, 1990-2022

20%

10%
Average change in poverty headcount ratio

-10%
relative to reference year

0%

-20%

-30%

-40%
-5 -4 -3 -2 -1 0 1 2 3 4 5 6 7 8 9 10
Years prior to and following joining the WTO,
or years prior to and following 2000 for non-WTO members
WTO members Non-WTO members

Source: Authors’ calculations, based on World Bank data on poverty headcount ratio.
Note: The figure displays the average change in the percentage of the population living on less than US$ 2.15 a day at 2017 purchasing power-
adjusted prices relative to the poverty headcount ratio in the year in which a given GATT/WTO member joined the WTO. For non-WTO members,
the reference year is set to 2000 due to data availability. Alternative reference years for non-WTO members do not change the trend. The average
poverty reduction rate is calculated by taking into account the proportion of individuals living in poverty in each economy relative to the global
population of individuals in poverty during the reference year.

- 25 -
opening commitments and to increase transparency exports, and drive rapid growth. For example, the 46
and information-sharing, and can help to strengthen least-developed countries (LDCs) – representing over
domestic institutions, to reinforce accountability, 880 million people – only account for 1 per cent of
and to support and promote the rule of law. This world trade, a share which has been stagnant since
can dramatically improve the environment for doing 1995, and that actually shrank to less than 1 per cent
business in an economy by curtailing the scope for over the last two years.
inconsistency and arbitrariness in policymaking.
Some of the trade challenges these economies
Creating a more stable, predictable and level economic face are external: high tariffs that can penalize poor
playing field benefits all economic actors, but it is economies’ exports; complex and fast-changing health
especially empowering for the smallest and least and technical standards that resource-constrained
powerful ones, such as micro, small and medium-sized economies often struggle to meet; and a growing
enterprises (MSMEs), women entrepreneurs, small- global subsidies race that is distorting markets and
scale farmers and artisans. Recent WTO analysis has tilting the economic playing field in favour of high-
found that WTO members experienced a faster drop in income and emerging economies.
poverty than non-WTO members (see Figure A.5), and But other trade obstacles these economies face
that developing economies acceding to the WTO that are internal. For example, import restrictions,
implemented more ambitious domestic reforms and inefficient customs procedures, or poor transport and
made deeper trade opening commitments during their communications infrastructure can drive up their trade
WTO accession negotiations than other GATT/WTO costs. A lack of coordination across trade-related
developing members grew, on average, 1.5 per cent policy areas, such as investment or trade financing,
faster than members that did not (Brotto et al., 2024). can reduce or negate the advantages of opening up
to trade. Insufficient investment in productive capacity,
These complex and inter-related policy challenges
technological upgrading and skills development, can
underscore the critical role that effective government
also prevent many low-income economies, and even
plays in successfully harnessing trade for sustained
some middle-income economies, from diversifying out
inclusive growth. Successful trade-led growth strategies
of agriculture and extractive sectors into more value-
have, in particular, benefited from governments’ ability
added exports.
to provide long-term stability, policy consistency and
coherent direction (Spence, 2011). As in the past, economic progress relies on adapting
to changes in the economy. The ability of workers to
Indeed, the pace and scope of global economic change
transition from lower- to higher-productivity jobs,
today – and the need for economies to continually adjust
and from declining sectors to growing ones, is one
and adapt – have raised the policy bar, rendering the
of the key mechanisms by which trade promotes
roles of governments and other institutions more, not
development and improves living standards. Today,
less, important, and their policy successes or failures
a major difference is the speed, scale and scope of
more, not less, consequential.
changes in the labour market caused by technological
progress and open trade, as new goods and services,
While much of the world is and even new industries emerge, requiring that others
converging, part of it is diverging adapt or face decline.

Many economies have experienced rapid growth and For individuals, it may be necessary to relocate to
find new employment, and this may involve significant
development in recent decades, but others are stalled
financial or administrative obstacles. As economies
or falling behind. Over the past 30 years, one third of
become more knowledge-driven, securing new
economies classified as low- or middle-income grew at
employment may depend on having more specialized
a slower rate than the average high-income economy.
skills, which may require retraining or earning additional
These diverging economies, representing 13 per cent
certifications. Individuals with lower incomes, workers
of the world’s population, are primarily in Africa, Latin
with fewer skills, small business-owners and some
America and the Middle East.
women may lack the skills, resources or flexibility to
These economies are failing to keep up with a rapidly adjust to new trade opportunities, and are more likely
expanding world economy for varied and complex to be adversely affected by economic change. In
reasons, but a common feature is their inability either the absence of adequate policy responses, the gap
to use trade as a pathway to integration into the between those who can adapt to and benefit from
global economy, or to leverage their existing trade economic change, and those who cannot, may widen,
access to move up the value-added ladder, diversify increasing inequality.

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 TRADE AND INCLUSIVENESS:
HOW TO MAKE TRADE WORK FOR ALL A INTRODUCTION

Moving towards more inclusive South-South trade – that is, trade among the emerging
and developing economies of the “Global South” – has
globalization presents grown from 8 per cent of world trade in 1995 to around
opportunities and challenges 25 per cent today, and at current trends it could reach
30 per cent by 2030 (see Figure A.6).
The ability of more economies to harness inclusive
trade-led growth will be a critical factor in determining Another positive development is that technological
whether the world economy continues to converge or advances continue to improve global connectivity and
begins to diverge again. The good news is that today’s drive down trade costs. New investments in transport
global economy offers more opportunities for trade- infrastructure are expanding global trade routes and
led growth than ever before. The bad news is that the making them more efficient, helping to link up even the
global economic system is itself facing new tensions most distant or landlocked suppliers to foreign markets.
that could restrict or roll back these new opportunities Trade corridors between Asia and North America, and
and cut short “the Great Convergence”. between Asia and Europe, now surpass the transatlantic
One positive development is the expansion of global trade corridor between North America and Europe,
demand. Developing economies are no longer while trade corridors between Africa and Asia or Latin
dependent on access to advanced-economy markets America and Africa are growing in importance.
alone to drive trade-led growth; increasingly, they can The spread of digital networks – underpinned by the
look to export to fast-expanding emerging markets internet, lower-cost telecommunications and new
as well.
digital platforms – is changing the way economies
These emerging economies are generating enormous connect to the global economy in even more
new demand for food, energy, minerals and fundamental ways. Some developing economies and
manufacturing inputs – which is in turn pulling other groups within economies, including small businesses
developing economies into their slipstream. And as owned by women, that have often been excluded
these developing economies begin their own economic from global services markets in the past – because
lift-off, they become new trade growth engines as well. services trade typically require geographical proximity

Figure A.6: Increasing trade between low- or middle-income economies, 1995-2022

100%

90%

80%

70%
Total bilateral trade

60%

50%

40%

30%

20%

10%

0%
11

13

15

17

19

21
97

99

01

03

05

09

12

14

16

18

20
95

96

98

00

02

04

06

08

10
07

22
20

20

20

20

20

20

20
19

19

20

20

20

20

20

20

20

20

20

20
19

19

19

20

20

20

20

20

20

Between low- and/or middle-income economies Between high-income and low- or middle-income economies Between high-income economies

Source: Authors’ calculations, based on WTO data on merchandise bilateral trade.

Note: The figure displays the composition of global merchandise trade flows by income group. The analysis excludes trade within the European
Union (i.e., intra-EU trade). The income groups are based on the 1995 World Bank classification.

- 27 -
– are fast becoming services exporters, because new international trade, is to reduce barriers and obstacles
digitally delivered services, such as online distribution, that currently prevent marginalized economies, regions
telemedicine and online business services can be and groups (including minorities, vulnerable people
delivered from any location on the planet that has and workers) from participating fully in and benefitting
internet access. from global markets.

This new services trade can offer developing The report makes the case that trade is a key part of the
economies advantages that goods trade does not: it solution to creating a more inclusive global economy, but
can be less capital-intensive, and less constrained that it requires more coherent and mutually supportive
by distance and infrastructure requirements (WTO, policies at the national and international level.
2019). Indeed, some developing economies are
bypassing the industrialization phase altogether and Chapter B focuses on the impact of trade on
are leapfrogging from agriculture to services exports inclusiveness across economies. It explores how trade
(Nayyar, Cruz and Zhu, 2021). has driven rapid growth across several key emerging
and developing economies since the mid-1990s,
One of the most significant positive changes is significantly accelerating convergence and narrowing
that developing economies can now look to other inequality. It also examines why some economies and
developing economies for inspiration and models regions have so far failed to harness trade as a driver of
for how to pursue trade-led growth strategies. In sustained growth, either because they not sufficiently
the same way that “early globalizers” such as Japan, integrated into the global economy, or because they
the Republic of Korea and Singapore helped to are limited to exporting low-value-added or highly
blaze a trail for other Asian economies in the 1980s volatile commodities. Common challenges that these
and 1990s, today’s “new globalizers” are, in turn, economies and regions face include high trade costs,
providing powerful examples for the next generation weak institutional capacity, geographical isolation
of developing economies seeking to leverage trade for and infrastructural deficits. This chapter points
faster growth. out that some trade policies can hinder economic
However, the ability to harness trade for even wider convergence, while others may not achieve the desired
global growth hinges fundamentally on the world effects. It also argues that geopolitical tensions, a
economy remaining open. Here there is cause for failure to bridge the digital divide and disjointed efforts
concern. to address environmental crises can create new
challenges for poor economies trying to integrate into
Trade openness and integration have slowed over the the global economy, that only concerted international
past decade and a half following a series of shocks action and cooperation can overcome.
to the global economy – such as the global financial
crisis, the COVID-19 pandemic and wars in Ukraine The focus of Chapter C is on the impact of trade on
and the Middle East – and the rise of geoeconomic and inclusiveness within economies. It highlights that,
geopolitical tensions. If today’s open world economy while economies as a whole have benefited from
starts to fragment as a result of rising protectionism, open trade and global integration, certain groups
economic nationalism and restrictive trade blocs, it of individuals (such as low-skilled workers in some
will harm the growth prospects of all economies, but sectors and certain groups of women), types of firms
the poor and economically marginalized will suffer the (such as MSMEs) and regions (such as rural areas)
most (WTO, 2023c). have not. Factors that have prevented people from
participating in and benefitting from trade include
The structure of this report limited mobility, low skills, restricted access to capital,
technological barriers, inadequate infrastructure, and
This year’s World Trade Report explores how trade political and legal obstacles. This chapter points out
has helped to widen the circle of global growth, why that some types of trade policies, such as protective
some economies, regions and groups are still being tariffs or export restrictions, can fail to achieve the
left behind, and what can be done domestically and desired effects, or even exacerbate inequality. The
internationally to ensure that millions more people can chapter emphasizes that open trade remains essential
harness trade to accelerate growth, “level up” with the to reduce poverty, but also warns of the risks that
rest of the world, and create a more inclusive global food insecurity, the digital divide, and winner-take-all
economy. economies can cause for the poor.

While the concept of inclusiveness can vary based Chapter D reviews the role of the WTO and international
on context and perspective, the core idea, in terms of cooperation in addressing inclusiveness both across

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TRADE AND INCLUSIVENESS:
HOW TO MAKE TRADE WORK FOR ALL A INTRODUCTION

and within economies. The WTO already promotes for developing members), while implementing
economic growth and inclusiveness by fostering complementary policies and strengthening
rules-based, non-discriminatory and predictable international cooperation. It calls for reducing trade
trade relations and by improving governance through costs, accelerating the accession to the WTO of new
credible economic reform. This chapter notes that members, ensuring equitable dispute resolution, and
many complementary policies for development and providing technical assistance to strengthen members’
inclusiveness require credible, transparent and capacity to implement WTO commitments and related-
coherent trade policy to be more effective, and vice domestic policies. Enhancing inter-agency cooperation
versa. It discusses how making further progress in can further help to leverage synergies between trade
economic convergence and inclusiveness, requires and complementary policies for development and
balancing credible WTO commitments and relevant inclusiveness, and to promote policy coherence and
flexibilities (i.e., special and differential treatment mutual supportiveness.

- 29 -
B
Trade and income
convergence
The past quarter of a century has witnessed an
unprecedented level of income convergence,
accompanied by the integration of many developing
economies into global markets. Despite this, some
economies have been left behind. This chapter
discusses how the participation of developing
economies in global trade and investment flows
can accelerate structural transformation and
enhance productivity growth, thereby helping low-
and middle-income economies to achieve the economic
growth that ensures convergence with high-income
economies. The chapter also examines why some
economies have taken little advantage of globalization,
and focuses on barriers to maximizing the gains from
trade participation, such as trade costs and commodity
dependence. Finally, the chapter discusses how recent
trends in the global economy are shaping future
opportunities and challenges for developing economies
to leverage trade and foreign direct investment for
economic growth, and which policies can help to
achieve convergence in the upcoming decade.

Contents
1. G
 lobalization has led to income convergence, but some economies
have been left behind 32

2. H
 ow did the integration of low- and middle-income economies
into global markets boost income convergence? 35

3. W
 hy have some developing economies gained little from globalization? 40

4. Future opportunities for economic convergence lie in strategies

to keep trade open and supported by complementary policies 55

5. C onclusions 63

- 30 -
Key points

• Trade expansion during the period 1995-2020 led to 30 per cent

faster income convergence of low-income economies. Despite this,
their income convergence and integration into the global economy
have been uneven, and some economies have been left behind.

• Developing economies and least-developed countries (LDCs) have

high trade costs relative to high-income economies. Manufacturing
and services trade is around 50 per cent more difficult for LDCs
than for high-income economies.

• Commodity dependence exposes economies to high volatility and

can negatively impact the development of other sectors, often
hampering sustained growth.

• Foreign direct investment (FDI) can play an important role in helping

economies to adopt new technologies and complex production
processes, but middle-income economies remain relatively less
open to FDI than high-income economies.

• Emerging global trends, such as geopolitical tensions, digital

revolution and climate change, are reshaping trade-led development,
presenting new threats to convergence, but also creating new
opportunities.

• Developing economies can capitalize on future trade opportunities

by tackling trade costs, promoting diversification based on
comparative advantages, and maximizing trade growth dividends
by improving domestic infrastructure and the business environment,
and by facilitating technology adoption.

- 31 -
 1. G lobalization has led to Goals, such as those associated with education
and health. According to data from the World Bank,
income convergence, the global share of people living in extreme poverty
but some economies have declined from 32.7 per cent in 1995 to 9 per cent
been left behind in 2022, even though the global population rose by
38.7 per cent during the same period.
The world has become more equal over the
The period of unprecedented income convergence
past three decades. Until the 1990s, there was
little evidence of poorer economies catching up with has been accompanied by a steep increase in
richer ones, a phenomenon known as unconditional trade participation (see Figure B.1). While part
convergence. However, since the mid-1990s, economic of this correlation may be related to the fact that
growth has been unambiguously characterized by economic growth leads to more trade and that other
unconditional convergence (Patel, Sandefur and common factors can cause an increase in both income
Subramanian, 2021; Kremer, Willis and You, 2022). per capita and trade, a compelling set of empirical
This has been due mainly to faster catch-up growth in research suggests that more trade also leads to
poorer economies, although the simultaneous slowing higher incomes (see Figure B.1) (Feyrer, 2019, 2021;
of growth in richer economies has also contributed. Cerdeiro and Komaromi, 2021).2 Comprehensive trade
Consequently, income inequality among economies liberalization in developing economies has been shown
has been decreasing for the last quarter-century. Only to increase income growth by an average of 1.0 to
the shock of the COVID-19 pandemic ended this era 1.5 percentage points, resulting in incomes higher by 10
of unconditional income convergence. to 20 per cent after a decade (Irwin, 2024). Trade has
been an essential component of high-growth episodes
Richer economies have a lower poverty rate,
that typically involved a shift of capital and labour to the
higher levels of education and longer life
tradeable manufacturing sector and intensified imports
expectancies. Although income per capita is an
of capital goods (World Bank, 2024a).
imperfect measure of development, it is correlated with
several dimensions of human development. Thus, the era Low- and middle-income economies have become
of global income convergence has been accompanied dominant in global merchandise trade. The
by a stark reduction in the global poverty rate1 and has increased trade participation of low- and middle-income
contributed to United Nations Sustainable Development economies has transformed the global trade

Figure B.1: Positive correlation between low- and middle-income economies’ convergence speed
and trade participation, 1996-2021
Speed of income convergence (percentage points)

8 160

7
140
Trade participation (100=1996)

5 120

4
100
3

2 80

1
60
0

-1 40
09

11

13

15

17

19

21
97

99

01

03

05

06

08

10

12

14

16

18

20
96

98

00

02

04

07
20

20

20

20

20

20

20

20
19

19

20

20

20

20

20

20
20

20

20

20

20
19

19

20

20

20

Speed of income convergence Trade participation

Source: Authors’ calculations, based on World Bank data on nominal GDP and real GDP per capita and WTO data on trade in goods and
commercial services.
Note: The figure displays the evolution over time of the population-weighted averages of trade participation and income convergence speed
between 1996 and 2021. The trade participation index is the share of goods and commercial services trade in GDP, adjusted for country size.
Speed of income convergence is expressed as the difference between the average real GDP per capita growth rate of low- and middle-income
economies and the average growth rate in high-income economies. The light blue fill indicates a contribution of negative growth in high-income
economies. The income groups are based on the 1995 World Bank classification.

- 32 -
 TRADE AND INCLUSIVENESS:
HOW TO MAKE TRADE WORK FOR ALL B TRADE AND INCOME CONVERGENCE

landscape. In 1995, more than a half of merchandise of the global population, and they represented several
trade flows were among high-income economies, income groups, as 43 per cent of them were low-
and only 5 per cent of global merchandise trade was income, 30 per cent were lower-middle-income and
exchanged within the low- and middle-income group. 27 per cent were upper-middle-income in 1995. Finally,
By 2021, the latter figure had jumped to 19 per cent, many of the converging economies are catching-up
while the share of merchandise trade among high- very slowly. If they were to grow at the same pace as
income economies had dropped to 32 per cent. in the past three decades, a third of the low-income
Exchanges between the two groups of economies converging economies would not even reach middle-
now dominate global merchandise trade. 3 The share
income status within the next three decades. 4
of least-developed countries (LDCs) in global trade
increased rapidly between 2000 and 2014, but has Diverging economies are concentrated in certain
stagnated since then at around 1.2 per cent. regions, and many are LDCs. The Middle East and
North Africa had the highest proportion of diverging
However, income convergence and integration
economies (56 per cent), followed by sub-Saharan
into the global economy have been uneven, and
Africa (42 per cent) and Latin America and the
some economies have been left behind. Figure B.2
Caribbean (40 per cent). All but one of the small Pacific
shows the relationship between trade participation
and income convergence over the past quarter of a Island states for which data are available also fell into this
century by country income group. First, it confirms that group,5 while there were no diverging economies in Asia
faster income convergence is typically associated with or Europe. The majority (71 per cent) of the diverging
higher trade participation, as highlighted in Figure B.1. low-income economies were LDCs, compared to
Second, although two-thirds of low- and middle- 56 per cent of the converging low-income economies.
income economies experienced income convergence All of the LDCs that have graduated from their LDC
between 1996 and 2021, one third did not converge. status (except Vanuatu) were in the converging group,
These “diverging” economies account for 13 per cent as well as the LDCs proposed for graduation in 2026.

Figure B.2: Many low- and middle-income economies are lagging behind, 1996-2021
7

6
Speed of income convergence (percentage points)

-1

-2

-3
-1.6 -1.2 -0.8 -0.4 0 0.4 0.8 1.2 1.6 2.0 2.4
Average trade participation gap (percentage points)

LDCs Low-income economies Lower middle-income economies Upper middle-income economies Commodity exporters

Source: Authors’ calculations, based on World Bank data on nominal GDP and real GDP per capita and WTO data on trade in goods and
commercial services.
Note: The figure displays the correlation between trade participation and convergence speed of economies that were low- or middle-income
in 1995. The trade participation gap is the share of goods and commercial services trade in GDP, adjusted for country size, expressed as a
percentage difference from the income group average. Income convergence speed is the annualized real income per capita growth between
1996 and 2021 expressed as the difference from the average growth in high-income economies. Economies below the horizontal axis did
not converge in their per capita incomes towards high-income economies. Economies on the left of the vertical axis had an average trade
participation below their income group average. The income groups are based on the 1995 World Bank classification. The LDC group is based
on the United Nations (UN) classification.

- 33 -
Three-quarters of diverging economies exhibited and LDCs, have had lower trade participation, were
trade participation that was below the average more likely to be commodity-dependent, and have had
of their income group. In some of the economies lower export complexity and a higher concentration
that have been left behind, economic activity, including of trade partners than their peers that started in the
trade, has been stunted by prolonged conflict same income group. On the other hand, economies
and political instability.6 In others, as discussed in that grew fast enough to move to a higher income
Section B.3(a), participation in international trade is group had higher trade participation, were less likely
hindered by trade policies, poor infrastructure, remote to be commodity-dependent, and had higher export
geographical locations and institutional environments complexity and a lower concentration of trade partners
that weigh particularly heavily on foreign transactions. than their peers that remained in the same group, as
The remaining quarter of diverging economies, did economies that have graduated (or are scheduled
mostly commodity exporters, saw slow income for graduation in 2026) from their LDC status
growth despite relatively high trade participation. compared to the LDC group average.
Most of this high-trade but slow-growth group consists Trade participation and diversification are
of commodity-dependent economies in which trade intertwined with the production activity of
participation has not led to structural transformation multinational companies, which can be an
and diversification. Income levels, together with the important conduit for technology diffusion and
size of the economy, typically determine the degree of economic upgrading (see Section B.2(c)). It is therefore
diversification. However, resource-rich economies often not surprising that the group of diverging economies
exhibit lower levels of diversification compared to their and LDCs cited above have also received considerably
peers at similar income levels. Section B.3(b) further
less foreign direct investment (FDI) compared to peers
discusses how the failure to diversify and move into
that started in the same income group (see Table B.1).
modern sectors can prevent economies from achieving
Indeed, FDI inflows to low- and middle-income
sustained growth despite high trade participation.
economies in the Middle East and North Africa and
There are significant differences in the degree in sub-Saharan Africa, where diverging economies
and scope of trade participation between fast- are concentrated, lag behind other regions. Even
growing economies and those lagging behind. within sub-Saharan Africa, there is high disparity, with
Table B.1 summarizes the characteristics for the Congo, Ghana, Mozambique, Nigeria and South Africa
different groups of economies. It shows that economies receiving more than 50 per cent of the FDI flows to
that have lagged behind, e.g., diverging economies the region.

Table B.1: Differences between fast-growing economies and those lagging behind

Economies Economies
Diverging
LDCs graduated from reaching a higher
economies
LDC status income group

Trade participation -15% -14% 8% 17%

Commodity
+2.5 p.p. +3.5 p.p. -17.5 p.p. -3.2 p.p.
dependence
Export complexity -65% -48% +46% +23%
Partner
+12% +18% +28% -10%
concentration
FDI participation -35% -16% +18% +14%

Source: Authors’ calculations, based on UNCTAD data on inward FDI flows, World Bank data on nominal GDP, real GDP per capita and the Herfindahl-
Hirschman index of imports and exports, WTO data on trade in goods and commercial services, and Harvard Growth Lab data on export complexity.
Note: The table compares different metrics of diverging economies, LDCs and economies that reached a higher income group to the average of
their 1995 income group over the period 1995-2021. Economies that have graduated from LDC status (including those proposed for graduation
in 2026) are compared to the average of the LDC group. “Commodity dependence” refers to the share of commodity-dependent economies
in the group, defined as having more than 50 per cent of exports concentrated in one commodity in any given year. “Export complexity” is the
average complexity of products in which the economy has revealed comparative advantage. “Partner concentration” is the average Herfindahl-
Hirschman index of imports and exports. “FDI participation” is the average share of FDI inflows in GDP. The income groups are based on the
World Bank classification. The LDC group is based on the United Nations (UN) classification; “p.p.” refers to percentage points.

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TRADE AND INCLUSIVENESS:
HOW TO MAKE TRADE WORK FOR ALL B TRADE AND INCOME CONVERGENCE

2. H
 ow did the integration of modern sectors by sheltering domestic firms from
foreign competition, fast-growing economies have
low- and middle-income gained access to modern production technologies
economies into global markets by attracting foreign investment, providing incentives
boost income convergence? to improve firm productivity and facilitating access to
foreign markets (Juhász, Lane and Rodrik, 2023).
Sustained and inclusive income growth is driven
Openness to international trade and investment
by continuous improvements in economy-
can boost structural transformation and
wide labour productivity. This can be achieved
productivity growth through several channels.
by investing in human and physical capital, and by
Trade and investment liberalization have accelerated
adopting new technologies. With the exception of
structural transformation in many economies by drawing
a few economies rich in natural resources, there are
workers from less productive to more productive
no examples of low-income economies that have
activities. Globalization also increased productivity
successfully become high-income economies without
within sectors by increasing the size of the markets that
improving their production technology levels (Cirera,
firms can access, thus fostering economies of scale
Comin and Cruz, 2022). Moreover, achieving sustained
and boosting the incentive to innovate, by intensifying
growth in the early stages of economic development
competition in the domestic economy and facilitating
requires productivity growth in activities that are
access to foreign technology, knowledge, know-how
labour-intensive and that underpin the transition from a
and to a larger variety of intermediate inputs of higher
subsistence economy to an economy characterized by
quality or at cheaper prices. FDI, especially in the
specialization and the smooth exchange of goods and
context of global value chains, has played an important
services, both domestically and with other economies.
role in the diffusion of new technologies, innovation
Hence, the typical path of a fast-growing, initially poor,
and production upgrading, particularly in middle-
economy between 1990 and 2018 involved a fast
income economies. A study of 27 emerging economies
productivity increase in four sectors: manufacturing,
shows that both competition from foreign firms and
wholesale and retail trade, transport, and business
linkages with foreign firms, as buyers or suppliers,
services (Herrendorf, Rogerson and Valentinyi, 2022).
increase product innovation, the adoption of new
Structural transformation that shifts employment technologies and quality upgrading (Gorodnichenko,
to more productive sectors and firms can be Svejnar and Terrell, 2010).
another important source of economy-wide
(a) E
 xport-led structural transformation
labour productivity growth. In the early stages of
increases aggregate productivity
economic development, structural transformation
typically means a shift from subsistence agriculture to By accelerating structural transformation that
industry and commercial services, from the informal draws workers into more productive firms
to the formal sector, and from state-owned to private and activities, specialization according to
(often foreign-owned) firms (McCaig and Pavcnik, comparative advantage can give rise to export-
2013; Gollin and Kaboski, 2023). It is estimated that led growth. A typical characteristic of low-income
labour reallocations between broad economic sectors economies is that a large share of employment
accounted for one half of productivity growth in low- is in informal subsistence farming and household
income economies between 1995 and 2017, and businesses, which tend to have lower productivity
for four-fifths of productivity growth in sub-Saharan and pay lower wages than the formal sector. A recent
Africa, specifically (Dieppe, 2021; Erumban and de study provides causal evidence that the reduced
Vries, 2021).7 trade policy uncertainty following China’s WTO
accession accelerated the structural transformation
Outward-oriented development strategies have
of the Chinese economy by stimulating investment
underpinned the success of most fast-growing
and output in both manufacturing and service sectors
developing economies that have undergone
(Erten and Leight, 2021). Their estimates suggest
structural transformation in the past three
that the resulting shift of workers from agriculture to
decades. Successful development strategies have
the more productive manufacturing sector led to an
combined access to international markets, know-how
increase in economy-wide labour productivity in the
and financing with investment in infrastructure and
range of 10 to 38 per cent between 2002 and 2013.
education, friendly and stable business environments,
and capable administration. Rather than using Evidence from several developing economies
protectionist trade policy to develop indigenous suggests that export-driven labour shifts from

- 35 -
informal to formal businesses can improve respectively, large formal manufacturing businesses
productivity, even within the exporting sector. In expanded and increased the share of manufacturing
Viet Nam, the 2001 trade agreement with the United value added in GDP. However, these large firms
States helped to accelerate Viet Nam’s structural did not expand their employment, while informal
change by propelling its exports of manufactured manufacturing and services firms did (Diao et al.,
products, such as footwear and textiles (see Box B.1). 2021). In Bangladesh, exports more than doubled in
While two-thirds of manufacturing workers were still real terms between 2002 and 2010, boosting formal
employed in informal household businesses in 2002, employment. Yet, the formal share of employment
the improved access of manufacturing exporters in Viet remained nearly constant at around 15 per cent
Nam to the US market led to the expansion of formal during that period because informal employment also
employment opportunities. This reduced informal expanded. This may be because the indirect demand
employment in Viet Nam’s manufacturing sector by generated through domestic supply chain linkages
around 7.5 per cent in the first two years following the and through higher incomes raised the consumption of
trade agreement, increasing labour productivity within local services (Goutam et al., 2017).
the sector by 1.5 to 2.8 per cent per year (McCaig
Export-driven expansion helps to improve
and Pavcnik, 2018). During this adjustment period, the
productivity in exporting firms by enabling
influx of new entrants was critical in generating formal
economies of scale and incentivizing the
manufacturing, with foreign firms playing an important
adoption of new technologies. Small market
role (McCaig, Pavcnik and Wong, 2023). Similar
size and low purchasing power in poor economies
export-led shifts of workers into formal employment
can hinder the adoption of new technologies. The
have been documented in Bangladesh, Botswana,
larger scale of production enabled by exports raises
Brazil and Cambodia (Costa, Garred and Pessoa,
revenues from innovation and technology adoption,
2016; Goutam et al., 2017; McCaig and McMillan,
motivating firms to incur the costs of implementing new
2020; Tanaka and Greaney, 2024).
technology or investing in research and development
While export-led growth can foster the formal (R&D), thereby increasing productivity (Aw, Roberts
sector in developing economies, certain and Xu, 2011; Bustos, 2011). Furthermore, the effect
factors may also cause informal jobs to persist. of market expansion can ripple through the economy
When exporting firms are highly capital-intensive, along the supply chain. When an exporter increases
their expansion generates few new employment its production, its suppliers can benefit from the larger
opportunities and therefore has limited impact on scale as well (Linarello, 2018). Based on data from
aggregate labour productivity improvements. In 94 economies over the period 1981-2015, Goldberg
Ethiopia and Tanzania, in 2008-16 and 1996-2017, and Reed (2023b) argue that, without access to the

Box B.1: Viet Nam’s export-driven structural transformation and FDI-driven export upgrading

Viet Nam’s economy in the 1990s was based on agriculture, fishing and food products. Like many poor
economies, Viet Nam was characterized by large differences in productivity across sectors, especially
between agriculture and manufacturing and some services (McCaig and Pavcnik, 2013).

During the 1990s and 2000s, Vietnamese workers moved out of low-productivity agriculture toward
higher-productivity manufacturing and services. These movements accounted for more than a third of the
aggregate productivity growth during this period. Resource reallocation within sectors also contributed to
labour productivity improvements, as workers moved from less productive household businesses toward
more productive registered firms in the enterprise sector, and from state-owned enterprises toward more
productive private domestic and foreign-owned firms.

Viet Nam’s trade agreement with the United States in 2001 significantly boosted its labour-intensive
manufacturing exports, such as footwear and textiles. The trade policy certainty resulting from the
integration of Viet Nam into the multilateral trading system paved the way for inward FDI, which has grown
exponentially since 2006 and has driven the rapid rise of Viet Nam’s comparative advantage in more complex
manufacturing, such as electronics, especially mobile phones (Samsung) and computer chips (Intel). At
its peak in 2018, Samsung accounted for a quarter of Viet Nam’s exports, providing an example of how
important multinational enterprises (MNEs) can be for an economy’s trade capacity and composition.

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TRADE AND INCLUSIVENESS:
HOW TO MAKE TRADE WORK FOR ALL B TRADE AND INCOME CONVERGENCE

global market, the average low- or middle-income increase with increased import competition (Amiti
economy would not have a large enough domestic and Konings, 2007; Topalova and Khandelwal, 2011;
market to achieve sustained poverty reduction. Finally, Shu and Steinwender, 2019). The positive effects of
information exchange with large foreign buyers (often foreign competition on innovation by domestic firms
trade intermediaries) can provide the know-how for have been found for both manufacturing and service
technology upgrading. Coupled with the potential for sectors and seem to not depend on the underlying
large orders from a market that values high quality, degree of competition in the industry (Gorodnichenko,
these interactions can lead to improved quality Svejnar and Terrell, 2010) Evidence from Colombia
and productivity (Atkin, Amit and Osman, 2017; Bold also shows that tariff liberalization had a strong
et al., 2022). positive impact on the productivity of firms facing
import competition, particularly benefiting larger firms
(b) B
 etter access to imported products and
and those in less competitive industries (Fernandes,
import competition can enhance firm-level
2007). Furthermore, import competition forced the
productivity
least productive firms to exit the market, which had a
Improved access to imported intermediate large positive impact on aggregate productivity (Eslava
inputs can enhance productivity within domestic et al., 2013).
firms and industries. By incorporating high-quality
(c) Participation in global value chains and
materials, components, services and technologies from
FDI facilitate the diffusion and adoption
abroad, businesses can streamline their production
of new technologies, improve productivity
processes, improve product quality and reduce
and drive export upgrading
costs. This not only strengthens the competitiveness
of domestic industries on the global stage, but can Participation in global value chains (GVCs) can
also foster innovation and efficiency improvements. be a powerful channel for technology transfer. By
Several studies from developing economies show that integrating into GVCs, firms in developing economies
firm productivity and competitiveness increases with can gain access to technology not only embodied in
imports of intermediate inputs, especially those with imported inputs, but also directly transferred by the
high technology content (Kasahara and Rodrigue, headquarter firms. Since outsourcing involves a high
2008; Topalova and Khandelwal, 2011; Gopinath and degree of interdependency in terms of production
Neiman, 2014; Halpern, Koren and Szeidl, 2015; Boehm, in different economies, headquarter firms are more
Levchenko and Pandalai-Nayar, 2023). Cheaper willing to transfer the know-how, management
access to foreign intermediate inputs also raises the practices and technology required for an efficient
relative return to using modern technologies which and seamless production of the outsourced inputs.
incentivizes their adoption. A recent study focusing on Empirical evidence suggests that GVC participation
the agriculture sector suggests that reductions in the has strong positive effects on productivity growth in
trade costs of agriculture inputs, such as fertilizers, the formal manufacturing sector in low- and middle-
machinery and pesticides, led to significantly higher income economies (Pahl et al., 2022). The impact of
shares of land farmed using modern technologies, GVC-related knowledge spillovers may go beyond
especially in middle-income economies (Farrokhi a one-off boost to productivity by spurring domestic
and Pellegrina, 2023). Finally, access to a larger innovation that is key to sustained growth, especially in
variety of intermediate inputs helps firms to introduce middle-income economies (Piermartini and Rubínová,
new products (Goldberg et al., 2010; Fieler, Eslava 2021).
and Xu, 2018).
FDI can play an important role in accelerating
Import competition may also lead to higher the host economy’s growth and its adoption of
productivity and increased innovation. In theory, more complex production processes. Foreign
increased competitive pressure from imports erodes firms bring intangible assets, such as new production
the profits of domestic firms which, depending on processes, management know-how and established
the underlying market conditions, either reduces brand names. They also bring skills, and help the
their innovation and productivity by shrinking their diffusion of knowledge through employee training and
resources and motivation to innovate, or increases interactions with local buyers and suppliers. Finally,
their innovation and productivity by motivating them the global production networks of MNEs provide
to escape or adapt to the competitive pressure access to major markets and to imported intermediate
(Aghion et al., 2005). Empirical studies have found inputs. Through all these channels, FDI has the
that, on balance, productivity and innovation may potential to increase productivity and innovation in the

- 37 -
host economies, helping them to achieve sustained capital, infrastructure or trade openness, and combined
economic growth and avoid the middle-income trap with the know-how, technology and management
– a situation when middle-income economies fail to brought by MNE investments in that economy (Freund
shift from growth strategies based on cheap labour and Moran, 2017).
and capital accumulation to strategies driven by R&D
Foreign-owned firms can further help to boost
investment and innovation (Gill and Kharas, 2007).
economic performance by improving the
Diversification and export upgrading in many productivity of their locally owned buyers and
developing economies has been driven by MNEs. suppliers. Evidence suggests that MNEs in upstream
Individual firms can play a pivotal role in determining sectors may offer local buyers more diverse and higher
the comparative advantage and specialization of quality intermediates and capital goods, thereby
economies. Empirical evidence shows that most of the boosting their productivity, export quality and product
top five exporters in developing economies are MNEs, scope. Moreover, vertical linkages with local suppliers
and that they accounted for almost half of export growth encourage the adoption of international best practices
and for a third of export expansion into new products and management techniques, as well as creating
and/or markets in the 2000s and early 2010s (Freund possibilities for cooperation on the development of
and Pierola, 2020). Examples of economies in which new and better quality products. 8 As domestic firms
MNE investment led to a shift in revealed comparative enter MNE supply chains they may also acquire the
advantage, from relatively low-skill products to new knowledge and skills essential for exporting, and often
complex ones, include Costa Rica, Malaysia, Morocco start exporting to the economies in which the MNE
and Viet Nam (see Box B.1 on Viet Nam and Box B.2 is headquartered, has affiliates or has established
on Costa Rica). The respective economy’s comparative customers. These experiences can lead to significant
advantage in these cases was shaped by local productivity gains, driven by an improved ability
characteristics, such as the availability of specific human to acquire new buyers (Carballo, Ottaviano and

Box B.2: FDI-driven economic diversification and upgrading in Costa Rica

Costa Rica’s economic landscape has undergone a remarkable transformation over the past three decades,
marked by a policy focus on attracting sustainable FDI. This shift propelled the country from reliance on
tropical fruit exports and tourism to a diversified economy anchored in high-tech manufacturing and service
sectors. Costa Rica’s income per capita growth was on average 2.4 per cent between 1995 and 2021,
moving the economy into the upper-middle-income group.

The economic transformation is reflected in the evolution of Costa Rica’s revealed comparative advantage.
In the 1990s, the economy specialized predominantly in agricultural products and tourism, but since the
2000s, it has been increasingly shifting into complex manufacturing sectors and high-skill services. Notably,
after 2015, comparative advantages in manufacturing medical and surgical equipment and in providing
professional, scientific and technical services have grown exponentially, underlining Costa Rica’s transition
to a diversified modern economy.

FDI has played a catalytic role in this economic shift. A pivotal moment for the Costa Rican economy came
in 1998, with the establishment by the technology firm Intel of an assembly and testing facility for computer
chips, which increased Costa Rica’s attractiveness to technologically advanced manufacturers. The medical
devices sector followed suit, with major players like Boston Scientific, Allergan, ICU Medical and Baxter
establishing or scaling up operations (Martinez and Padilla, 2017). Intel’s investment in the training of its
employees and collaboration with public universities has built up Costa Rica’s absorptive capacity, creating
a fertile environment for knowledge transfer and for the further creation of new business opportunities
(Rodríguez-Clare, 2001).

Although Intel moved its manufacturing production to Asia in 2014, the medical devices sector has
continued its evolution from low-cost manufacturing to specialized processes and has become Costa Rica’s
main manufacturing specialization. Moreover, Intel has continued to rely on its investment into Costa Rica’s
workforce by setting up an R&D facility and a corporate services centre for its global operations, driving the
economy’s exports of scientific, professional and technical services.

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TRADE AND INCLUSIVENESS:
HOW TO MAKE TRADE WORK FOR ALL B TRADE AND INCOME CONVERGENCE

Volpe Martincus, 2018; Alfaro Ureña, Manelici and workers and the resources spent on public research are
Vasquez, 2022). important factors in improving absorptive capacity in an
economy (Augier, Cadot and Dovis, 2013; Piermartini
Even local firms outside MNE supply chains can
and Rubínová, 2021). Collaboration between industry
benefit from better supplier bases and from
and research institutions is also crucial to adapt foreign
hiring workers with skills acquired in MNEs.
technologies to domestic conditions (see Box B.2).
As discussed above, local suppliers of MNEs improve
their productivity as well as product quality and (d) Trade costs reduction have helped to
variety. These improvements also benefit local firms accelerate income convergence
that share suppliers with MNEs, leading to product
Trade cost reductions and the resulting trade
scope expansion and higher productivity. Further,
either by observing the foreign firms or by means expansion have significantly contributed to
of hiring former MNE employees, local firms can income convergence. A simulation analysis using
learn about procedures that improve the quality and the WTO Global Trade Model suggests that trade cost
standardization of their products, their marketing skills, reductions between 1995 and 2020 led to around
and the reliability of their shipments. When domestic a 6.8 per cent increase in global real GDP over the
managers work at MNEs and gain exposure to high- period, with low-income economies growing by
quality management practices, they can transfer this around 33 per cent. In the model, reductions in import
knowledge to new workplaces when they switch jobs costs increase productivity thanks to specialization
(Poole, 2013; Bloom et al., 2020; UNCTAD, 2021c). according to comparative advantage, improved
access to intermediate inputs, and the diffusion of
Yet, the mere presence of or connections to
ideas through imports of intermediate inputs from
MNEs may not guarantee the spillover of tacit
economies with higher levels of technology. The low-
knowledge such as management practices. While
and middle-income groups saw larger reductions
significant spillovers of management knowledge often
in trade costs over the period than the high-income
occur within firms, improvements can be short-lived
group and, consequently, they grew faster. Moreover,
and easily reversed when managerial turnover takes
place (Bloom et al., 2020). Moreover, language barriers
can be a critical obstacle to the spread of foreign Figure B.3: Faster income convergence due to
managerial practices to domestic managers. Using trade costs reduction, 1995-2020
randomized controlled trials in firms in Myanmar, one
Speed of income convergence (percentage points)

6
study found that reducing language barriers through 5.6

subsidized English lessons can enhance the transfer of 5 1.2

management knowledge (Guillouet et al., 2024).
4
Technology transfer is facilitated by the presence
of an adequate institutional environment, 3
openness and investment into education and
research. To exploit a new foreign technology, firms 2 4.4 1.8
need to have sufficient absorptive capacity to enable 0.3 1.3
0.3
them to learn how to use it, as well as, potentially, 1
1.5
to adapt a technology developed abroad to local 1.0
0
conditions. Adoption of new technologies requires Low-income Lower middle-income Upper middle-income
high-skilled workers and high-quality inputs. However, economies economies economies

these may be scarce and expensive for firms in Baseline Trade cost reduction

developing economies, and this may limit technological

Source: Authors’ calculations, based on WTO Global Trade
progression (Alfaro-Serrano et al., 2021). Firms in low- Model.
income economies may find technologies from high- Note: The figure displays the estimated contribution of trade
costs reduction to average income convergence by income
income economies too advanced to adopt; an important group between 1995 and 2020. Speed of income convergence is
reason for this is inconsistent access to electricity, expressed as the difference between the average annualized real
GDP per capita growth rate of an income group and the average
which has prevented many low-income economies growth rate in high-income economies between 1995 and 2020.
from completing previous technology revolutions, The baseline component is the predicted speed of convergence
if trade costs remained at their 1995 level. The trade costs
therefore also making it difficult for them to adopt the reduction component is the additional speed of convergence due
latest technologies (Cirera, Comin and Cruz, 2022). In to the observed reduction in trade costs. The income groups are
based on the 1995 World Bank classification.
addition, the quality of education, the number of skilled

- 39 -
less technologically advanced economies have trade in services with LDCs than with high-income
a higher potential to benefit from the diffusion of economies.
ideas facilitated by trade, which also contributes to
In Africa and the Middle East, trading with
convergence. For low-income economies, the diffusion
partners within the region is more difficult than
of ideas accounted for around two-thirds of the effect
trading with partners from other regions. This is
of lower trade costs on their income growth. Overall,
in contrast to other regions in the world, where intra-
the analysis shows that the trade costs reductions
region trade usually incurs lower import and export
led to between 20 and 35 per cent faster income
costs due to closer geographical proximity and shared
convergence of low- and middle-income economies
cultural or institutional similarities. This has been
(see Figure B.3). confirmed by estimates of the WTO Trade Cost Index,
which suggest that trade costs within regions are 20 to
3. W
 hy have some developing 40 per cent lower compared to trade costs between
economies gained little from regions. However, the region of Africa and the Middle
East is an exception, with intra-regional trade costs
globalization?
20 per cent higher than extra-regional trade costs.
Economies in which growth has remained slow or Trade policy barriers and regulatory differences
stagnant typically show low trade participation, are still an important component of overall
are heavily dependent on commodity exports, trade costs. Despite relatively low levels of applied
and receive little FDI. As discussed in the previous tariffs and the expansion of regional trade agreements
section, many developing economies have taken (RTAs), trade policy and regulatory differences are as
advantage of globalization to reinforce the impact of important as geographical distance in explaining trade
domestic economic reforms on their economic growth. costs variation of low- and middle-income economies
They have done so by reducing importing and exporting (Rubínová and Sebti, 2021). This points towards the
costs, and by leveraging access to foreign consumers, salience of non-tariff measures in constraining trade
products, capital and technology to accelerate growth in developing economies.
structural transformation and diversify their production
(i) E
 conomic development can be hindered
towards modern sectors. On the other hand, as shown
by some trade policies faced by developing
in Section B.1, economies that have lagged behind
economies
remain at the margins of global trade and investment
flows, typically due to high trade costs, commodity Developing economies, and especially LDCs, are
dependence and poorly functioning domestic markets. granted preferential access to many markets. The
Generalized System of Preferences (GSP), currently
(a) B
 arriers to trade participation hinder granted by 16 economies, consists of non-reciprocal
economic convergence sets of measures designed by each granting economy,
There are still important gaps between the trade where most schemes contain lower preferential
costs of high-income economies and those of tariffs (including duty-free) for LDCs and developing
the rest of the world. The rapid expansion of global beneficiaries (UNCTAD, 2023a). An additional eight
trade in the 1990s and 2000s was fuelled by declines economies grant duty-free treatment for LDCs, while
in transportation, communications and transaction several high-income economies complement their
costs, as well as in trade policy barriers. However, this GSP schemes with region-specific preferences, such
decline in trade costs slowed after 2012, especially in as the African Growth and Opportunity Act.10
middle- and low-income economies (WTO, 2023c). However, compliance costs limit the use of LDC
The WTO Trade Cost Index,9 a measure of all the preferences. The degree to which LDC exporters make
frictions that remain in international trade relative to use of preferences varies substantially across sectors
domestic trade, shows that the remaining gap between (Richtering and Verbeet, 2020). Figure B.5 shows the
trade costs in high-income economies and in low- and relationship between the average LDC preference
middle-income economies remains particularly large margin, that is, the difference between the tariff applied
in manufacturing and services (see Figure B.4). The under (the best) LDC preferential treatment and the MFN
group of low- and lower-middle-income economies tariff, and the average share of LDC exports that make
has manufacturing trade costs 34 per cent higher than use of the preference. The highest preference utilization,
those in high-income economies, and the gap reaches above 90 per cent, is in the categories “Coffee, tea,
47 per cent in LDCs. There is a similar disparity in the cocoa and spices”, “Clothing”, “Fish and fish products”
services sector, as it is 50 per cent more difficult to and “Beverages and tobacco”. Preference utilization

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 TRADE AND INCLUSIVENESS:
HOW TO MAKE TRADE WORK FOR ALL B TRADE AND INCOME CONVERGENCE

Figure B.4: Higher trade costs in lower-income economies relative to high-income economies, 2020
50%
50%
47%
Trade costs relative to high-income economies

40%
34%

30% 28%

20%
20%
15%
12% 12%
10%
5%

0%
Agriculture Manufacturing Services
LDCs Low- and lower-middle-income economies Upper-middle-income economies

Source: Authors’ calculations, based on the OECD trade in value added (TIVA) database and WTO trade cost index methodology.
Note: The figure illustrates the average trade costs in low- and middle-income economies compared to high-income economies in 2020 by
sector. The analysis covers 71 economies, including 34 low- or middle-income economies and five LDCs. The income groups are based on the
2020 World Bank classification. The LDC group is based on the United Nations (UN) classification.

is positively correlated with the size of the preference standards affect trade through two opposing forces.
margin, suggesting that exporters only use preferences On the one hand, they typically raise producer costs
when the benefit (i.e., the preference margin) outweighs by requiring investment in upgrading production
the costs of preference utilization. Factors influencing techniques, packaging, labelling and other compliance
this trade-off include the stringency of rules of origin expenses. On the other hand, regulatory policies such
and bureaucratic requirements for importers, such as TBT and SPS measures can redress information
as expensive audited paperwork per shipment, as asymmetries between consumers and sellers and thus
well as the size of exports for exporters (Bekkers and serve as catalysts for trade participation for producers
Cariola, 2024). from developing economies (Maertens and Swinnen,
Simplifying rules of origin leads to higher 2009; WTO, 2012). Moreover, quality and safety
preference utilization. Rules of origin are the criteria standards can increase product values, incentivize
used to determine the provenance of a product and technology transfers and affect the distribution
thus its eligibility for preferential treatment. Evidence of profits along the value chain, potentially to the
from the Dominican Republic-Central America Free benefit of small firms (Swinnen, 2016). The overall
Trade Agreement indicates that simple rules that impact on trade volumes therefore depends on the
require exported products to have a different tariff balance between the two forces, which varies across
classification from imported inputs lead to higher consumers (according to their preferences) and
preference utilization due to lower compliance costs. producers (according to their ability to comply).
Conversely, more complex rules, requiring compliance Producers in poor economies may face high
with technical requirements and prohibiting the use of costs of compliance with standards. The impact
certain imported inputs alongside tariff classification of standards depends on the ways in which these
changes, are associated with lower preference
policies are implemented. For example, inspections
utilization (Lee and Cunha, 2024). Evidence from the
at borders and other formalities to assess conformity
simplification of rules of the European Union’s GSP
with regulations can increase trade costs and distort
also shows a positive impact on preference utilization
trade to various degrees. Compliance with standards,
(Tanaka, 2021; Tanaka and Fukunishi, 2022).
or even the demonstration of compliance, may be
Standards may have positive impact on exports particularly burdensome for producers in poor and small
from developing economies, but the impact economies, because investments in compliance, as well
depends on the cost of compliance. Regulatory as many conformity assessment-related costs, do not
measures such as technical barriers to trade (TBT), vary with quantities of sales, and therefore represent
and sanitary and phytosanitary (SPS) measures much higher obstacles to trade for small exporters and
have proliferated over the past three decades. These for those with limited access to financing.

- 41 -
 Figure B.5: Positive correlation between LDCs’ preference utilization and preference margin size,
2022

Clothing
Coffee, tea,
100% cocoa and spices
Other
agricultural Beverages
Minerals and metals products and tobacco
95%

Rubber, leather and footwear Fish and fish products

90%
Fruits and vegetables
Textiles
Preference utilization rate

Cereals and food preparations

85%
Wood, paper,
and furniture Chemicals
80%

Transport equipment
75%
Other manufactures

70%
Petroleum

65%
Electrical machinery and electronic equipment

60%
0% 2% 4% 6% 8% 10% 12% 14% 16%
Weighted preferential margin

Source: Authors’ calculations, based on WTO data on preferential tariffs and related trade flows.
Note: The figure shows the correlation between the weighted preferential margin and preference utilization rate in 2022. The analysis covers the
imports from LDCs to the European Union, Iceland, Norway and the United States. The size of each circle corresponds to LDCs’ total exports of
the product category.

The number of concerns raised by developing subsidized products while benefiting net importers.
economies with regard to regulatory measures The overall impact on low-income economies and
has increased. TBT and SPS measures that may LDCs may vary, nevertheless, depending on their
excessively distort trade can be gauged from the status as net importers or exporters. Modelling studies
specific trade concerns raised by WTO members find that both import barriers and producer subsidies
about other members’ measures.11 The number of in the agriculture market reduce global economic
concerns raised or sponsored by low- and middle- welfare and agricultural trade, while also contributing
income economies has increased over the years (see to global inequality and poverty (Anderson, 2013).
Figure B.6). Until 2016, this increase was driven by a Import market access distortions, such as tariffs and
rise in concerns about other low- or middle-income regulatory measures, tend to have a greater market-
economies’ measures, but since then the proportion distorting effect than domestic support, accounting for
addressed to high-income economies appears to have less than one-tenth of the welfare effects (Anderson,
risen again. Concerns increased markedly in the three Martin and Valenzuela, 2006).
years after the outbreak of the COVID-19 pandemic,
The impact of industrial subsidies is potentially
returning to pre-pandemic levels only in 2023.
more complex than that of agriculture subsidies.
Subsidies can suppress international prices and Industrial sectors typically make up a part of long
contribute to the inefficient and unsustainable international supply chains, and therefore subsidies to
allocation of scarce resources. Subsidies producers in one industry can have pronounced effects
can distort international trade by boosting the on foreign producers not only in the same industry, but
competitiveness of domestic producers relative to also in upstream sectors, through increased demand
their competitors abroad, and these distortions can for inputs, and in downstream sectors, through
manifest as an erosion of market access commitments cheaper costs of intermediate inputs supplied by the
in the domestic economy or as an increase in exports subsidized industry. Moreover, some subsidies, such
that displaces other producers in foreign markets. as those for green technologies, can have positive
Subsidies can therefore harm net exporters of spill-over effects and benefit other economies.

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 TRADE AND INCLUSIVENESS:
HOW TO MAKE TRADE WORK FOR ALL B TRADE AND INCOME CONVERGENCE

Figure B.6: Growing number of concerns about SPS and TBT measures raised by low- and
middle-income members, 1995-2023

and TBT concerns addressed to high-income economies

80 100%
Number of low- and middle-income economies' SPS

Share of low- and middle-income economies' SPS

60 75%
and TBT concerns

40 50%

20 25%

0 0%
97

99

01

03

05

09

11

13

22

23
95

96

98

00

02

04

06

08

10

12

14

15

16

17

18

19

20

21
07
19

19

20

20

20

20

20

20

20
19

19

19

20

20

20

20

20

20

20

20

20

20

20

20

20

20

20

20

20
Concerns raised by at least one low- or middle-income economy Share of concerns addressed to high-income economies

Source: Authors’ calculations, based on WTO data on SPS and TBT trade concerns.
Note: The figure displays the evolution of the number and share of trade concerns raised by low- and middle-income members in the SPS and
TBT committees over the period 1995-2023. The income groups are based on the 1995 World Bank classification.

Agriculture producer subsidies used to be above, many of the channels through which openness
concentrated in high-income economies, but in fosters growth relate to imports. Higher tariffs act from
the past decade large middle-income economies this perspective as a barrier to growth. In fact, applied
have accounted for almost half of global tariffs13 have remained relatively high in low-income
agriculture subsidies. There are important gaps economies and LDCs over the past decade, at around 8
in the available knowledge about subsidy practices; per cent on average, compared to 5 per cent in middle-
most of the data that are available for a broad scope income economies and 3 per cent in high-income
of economies and sectors refer only to counts of economies. If we consider the group of diverging
measures and have important shortcomings (IMF et al., economies (as defined in section B.1), they apply higher
2022). Agriculture is one exception where systematic average tariffs compared to other economies in their
evidence on quantities of subsidies exists, having income group, and this difference has only increased in
been collected by the Organisation for Economic the past decade. Barriers to services imports, on the
Co-operation and Development (OECD). At their peak other hand, show, on average, little difference between
in 1999, subsidies to agriculture producers in high- developing and high-income economies. An exception
income economies reached 8.4 per cent of global is the lower-middle-income group, in which services
agriculture production value. These subsidies declined trade restrictions are, on average, 17 per cent higher
rapidly in the 15 years following, and they have than in high-income economies.14
remained at between 3.6 and 4.2 per cent of global
agriculture production value since 2014.12 Large While GSP schemes may offer developing
emerging economies, on the other hand, saw rapid economies access to consumers in high-
increase in agriculture production subsidies between income economies, reciprocal trade agreements
1999 and 2008, which have remained at 3.0 to 3.8 per still offer significant potential to boost trade.
cent of global agriculture production value since then. Economic integration with nearby economies provides
opportunities to increase market size, and thus to
(ii) S
 ome trade policies in developing achieve economies of scale and attract imports
economies can hold back their economic and FDI. For Africa, the African Continental Free
development
Trade Area could be an important step forward in
Import tariffs remain relatively high in low- this regard. Integration with high-income economies
income economies and LDCs, while services has the additional potential benefit of stimulating
trade barriers are relatively high in the group of technology transfers by facilitating GVC participation
lower-middle-income economies. As discussed and providing access to sophisticated consumers

- 43 -
with strong purchasing power (as discussed in WTO Trade Facilitation Agreement (TFA), there has
Section B.2). However, while non-reciprocal trade been substantial progress in the implementation of
arrangements, such as GSP schemes, may provide measures and technologies that facilitate international
the access to consumers in high-income economies, trade (see Figure B.8). These include measures
they are subject to regular government reviews and covered by the TFA, such as transparency, institutional
can be easily withdrawn, which generates high policy arrangement and cooperation, and formalities and
uncertainty and thereby hinders long-term investment transit facilitation, as well as technology adoption
into trade relationships (Handley and Limão, 2022; such as paperless trade measures that make the
Tanaka, 2022). communication between government agencies and
traders, and among government agencies, easier
Low-income economies and LDCs have signed (UN-ESCAP, 2023). However, progress has been
fewer RTAs with high-income economies. They relatively slow in low- and lower-middle income
also tend to have fewer RTA partners than middle- economies.
income economies (see Figure B.7). Moreover, most of
this disparity stems from the lack of RTA partners that (iii) U
 nder-developed infrastructure and
are high-income economies. This is particularly striking geographical challenges impede sustained
for LDCs in South Asia and sub-Saharan Africa, which economic development
may, at least partly, be a reflection of the remoteness of Physical and digital infrastructure and the
these regions from global centres of economic activity. distribution sector play an important role in the
ability of firms to participate in and benefit from
Low- and lower-middle income economies
trade. Size can prove an obstacle for small developing-
have made the least progress in implementing
economy firms wishing to achieve the necessary
measures and technologies that facilitate
economies of scale to be internationally competitive
international trade. Since the conclusion of the
and to pay the fixed costs associated with exporting
or importing. But even in larger economies that could
Figure B.7: Fewer trading partners in RTAs potentially achieve enough scale, high internal trade
signed by lower-income economies, 2023 costs coupled with poverty lead to small and segmented
markets, distort production and reduce the potential
Lower middle-income gains from trade-opening (Co ar and Fajgelbaum,
economies 27 6 33
2016; Leone, Macchiavello and Reed, 2021). For
Upper middle-income
21 7 28 instance, empirical evidence shows that the marginal
economies
costs associated with distances in Ethiopia and
RTAs

Low-income
20 2 22
Nigeria are four to five times higher than in the United
economies
States, and this difference is only partly explained by
the poor quality of transport infrastructure (Atkin and
LDCs 20 2 22
Donaldson, 2015). This points to the importance of
complementing physical infrastructure with competitive
East Asia and the Pacific 18 7 25 infrastructure services, such as electricity, transport
and telecommunications. Moreover, an uncompetitive
RTAs signed by LDCs

Sub-Saharan Africa 21 2 23 distribution sector can also drive a wedge between

local producers and foreign customers. For instance,
South Asia 19 2 21 cashew farmers in Mozambique saw little benefit
when the government removed export restrictions on
Middle East and
North Africa 15 4 19 cashews, as trade intermediaries that connect farmers
to the export markets retained most of the ensuing price
Latin America and
the Caribbean 9 5 14 increase (McMillan et al., 2003).
0 5 10 15 20 25 30
Average number of RTA partners There is a large gap between low-income
Low- and middle-income RTA partners High-income RTA partners
and high-income economies in terms
of the liberalization of electricity and
Source: Authors’ calculations, based on WTO data on notified telecommunication services, data from the
RTAs.
Note: The figure shows the average number of RTA partners by
International Monetary Fund’s (IMF) Structural Reform
income group in 2023. The analysis cover 120 low- and middle- Database show. This gap widened in the 2010s,
income economies. The income groups are based on the 2023 suggesting limited improvement in the provision of
World Bank classification.
these infrastructure services, which are essential not

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 TRADE AND INCLUSIVENESS:
HOW TO MAKE TRADE WORK FOR ALL B TRADE AND INCOME CONVERGENCE

Figure B.8: Limited trade facilitation implementation in lower-income economies, 2015 and 2023
90%
84%
Average trade facilitation implementation rate

80%
74%
70%
61%
60% 58%
55%
50% 46%
42% 41%
40%

30%

20%

10%

0%
Low-income Lower-middle-income Upper-middle-income High-income
economies economies economies economies
2015 2023

Source: Authors’ calculations, based on UN-ESCAP survey data on trade facilitation.

Note: The figure shows the average rate of trade facilitation implementation in 2015 and in 2023 by income group. The income groups are based
on the 2023 World Bank classification.

only for overall productivity improvements, but also missing links in highway networks and regulatory
for connecting sellers with buyers and accessing hurdles have a considerable impact on trade
information through digital tools, thereby reducing the performance, especially in Africa (Djankov, Freund
need for middlemen and facilitating trade participation. and Pham, 2010; Freund and Rocha, 2011; Hallaert,
Moreover, while information and communications Cepeda and Kang, 2011). With 16 landlocked
technology (ICT) penetration (measured by mobile economies accounting for about 30 per cent of Africa’s
and fixed-line telephone and internet subscriptions) total population, solving issues associated with trade
converged in most of the world between 2000 and facilitation and transit corridors linking landlocked
2018, sub-Saharan Africa and South Asia were two economies to seaports is essential for the continent’s
regions where it has diverged (Saba and David, 2020). trade integration. Services trade policies that enhance
access to infrastructure services, particularly in
Lack of financial infrastructure and of
telecommunications and air transport services, are
interoperable regulatory systems hinders
also important to enhance connectivity of landlocked
cross-border payments. Cross-border payment
nations (Borchert et al., 2017).
systems are crucial for the smooth operation of cross-
border transactions. The lack of financial and digital Small island developing states incur high
infrastructure, combined with limited competition transportation costs. Geographical position off
among financial service providers, increases the costs the main trading routes and small scale of trade lead
of international payments and thus the transaction to high shipping costs for traders in remote small
costs associated with international trade. These island economies. According to the latest estimates
shortcomings also increase the costs of transferring from UNCTAD, small island developing states pay
remittances, i.e., the money that migrants send to their 60 per cent more than other developing economies for
home countries (see Box B.3). transporting their exports.15

Landlocked developing economies face (iv) Weak rule of law and contract enforcement
particularly high trade costs due to poor hamper economic development
infrastructure connectivity and regulatory International trade relationships are particularly
hurdles associated with crossing multiple sensitive to weak contract enforcement. A
borders. Estimates based on the WTO Trade Cost defining feature of many developing economies is
Index methodology show that export and import costs that they have weak institutions, with weak rule of law
in agriculture and manufactured products in landlocked perhaps being the most obvious manifestation of this
developing economies are around 30 per cent higher (Atkin et al., 2022). While, of course, institutions matter
compared to coastal developing economies (WTO, for domestic transactions, international transactions
2021a). Transit delays, infrastructure bottlenecks, typically incur larger monetary and time costs between

- 45 -
 Box B.3: The role of remittances for development

Remittances – funds transferred by migrants to their home countries – are vital for development. In 2023,
76 per cent of remittance flows, totalling US$ 656 billion, went to low- and middle-income economies
(World Bank, 2024c). In recent years, these financial flows to developing economies have exceeded the
combined sum of FDI and official development assistance, and this gap is growing wider. Remittance
flows and cross-border payments have shown resilience and steady growth, contrasting with the cyclical
adjustments of private capital flows. Due to increasing migration pressures, remittances are expected to
grow in the coming years.

With 200 million people sending money and 800 million family members receiving these funds, remittances
provide essential support for household consumption, including food, housing, education and healthcare.
They also provide capital for small business development, spurring entrepreneurship and new business
ventures, offering opportunities for diaspora investments in home countries and reducing information
asymmetries regarding new trade and investment opportunities in both the country of origin and the country
of destination. These financial inflows can also contribute to national economic stability by boosting foreign
exchange reserves and financing public infrastructure projects.

While increased competition, improved digital infrastructure, use of digitalized financial channels, and
enhanced financial literacy have contributed to lowering the cost of remittances, to a world average of about
6.2 per cent in 2023, this cost reduction has plateaued in recent years (World Bank, 2024b). Regionally,
South Asia has the lowest average cost of remittances, at 5.2 per cent, while sub-Saharan Africa has the
highest, at 7.7 per cent. Cash remains the primary method for sending remittances, predominantly through
the costliest channels, namely banks, post offices and money transfer operators. Factors such as high
foreign currency exchange fees, costly agent management, limited competition among service providers,
small remittance corridors, and a lack of interoperable regulatory frameworks and payment systems all
contribute to high remittance costs. In some regions, such as sub-Saharan Africa, informal channels are
still used for remittances, and this leads to higher costs. In many developing economies, particularly in rural
areas, poor digital and financial inclusion infrastructure hinders migrants from accessing and utilizing cost-
effective digital alternatives to send remittances.

United Nations Sustainable Development Goal target 10.c (“Reduce inequality within and among countries”)
aims to reduce migrant remittance transaction costs to less than 3 per cent, and to eliminate remittance
corridors with costs exceeding 5 per cent by 2030. Achieving a 3 per cent cost target would result in an
additional US$ 32 billion in annual remittances (Kpodar and Imam, 2024). Reducing the cost of remittance
services could be achieved through various strategies, such as by enabling competition through clear and
proportionate regulations that accommodate diverse financial services providers, by developing national
money payment systems, by expanding digital public infrastructure, or by ensuring regulatory convergence
and cross-border payment interoperability. Enhancing financial and digital literacy could also contribute to
reducing information asymmetries and to empowering migrants to make informed financial decisions and use
cost-effective digital alternatives.

production and delivery, and require contracting across Trade finance can help to mitigate the risks
jurisdictions. This increases the risks associated with associated with weak contract enforcement but
not delivering or not paying when trading with partners firms in many developing economies have limited
in economies with weak rule of law. For instance, a access. Many studies have documented the ways in
study of cross-border transactions of a US-based which firms try to overcome contract enforcement risks
poultry exporter found that only firms in importing when sourcing from developing economies, such as
economies characterized by weak rule of law are establishing long-term relationships with suppliers that
required to pay the exporter cash in advance (Antràs help to incentivise behaviour which might otherwise
and Foley, 2015). For cash-constrained importers in be difficult to contract upon or incorporating suppliers
developing economies, these cross-border payment in their ownership structure (Hansman et al., 2020;
terms represent a substantial barrier to international Boudreau, Cajal-Grossi and Macchiavello, 2023).
trade (Ahn, Amiti, and Weinstein, 2011). However, these strategies require investment, which

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Box B.4: Availability of trade finance in West Africa and in the Mekong region

The availability and cost of trade finance vary greatly across economies and levels of development. According to
two recent joint reports by the WTO and International Finance Corporation (IFC), the share of trade supported by
trade finance stood at 15 per cent in Senegal and 20 per cent in Nigeria and in Viet Nam, while it was only 3 per cent
in Cambodia and in Lao PDR (IFC and WTO, 2022, 2023). In contrast, the average share of trade supported
by trade finance in the African continent – including emerging markets such as Egypt, Morocco and South
Africa, hosting some of the continent’s largest banks – was 40 per cent. According to the Bank for International
Settlements (2014) and WTO (2016), the share of trade supported by trade finance in developed economies
appears to be equal or superior to 60 per cent.

The availability of trade finance in developing economies can be gauged from the rate of rejections by banks of
trade finance requests from exporters and importers. While statistics on rejection rates are not available for all
economies, existing surveys indicate that rejections rates by banks for trade finance applications are high in low-
income regions. For instance, the rejection rate in West Africa is 25 per cent of the value of requests, against
12 per cent for the African continent (AfDB and Afreximbank, 2020; IFC and WTO, 2023).

A part of these rejections can be justified on grounds of lack a creditworthiness of firms, a motive that can
also be found in developed economies; but another part of these rejections can be attributed to supply and
demand factors more specific to developing economies. These include poorly documented applications, lacking
or insufficient correspondent banking relations and lines of credit, insufficient access to foreign currency and
lack of scale for local banks, preventing them from financing higher value trade transactions, and shortages of
low-cost funding (IFC and WTO, 2022, 2023). Moreover, while traded merchandise is used as collateral for trade
finance, in low-income economies, further collateral is often sought by banks due to doubts that legal enforcement
mechanisms would allow them to take ownership of the merchandise in case of default. Thus, it is the lack of
collateral and high perception of the applicant risk that top the list of banks’ motives for rejections of trade finance
applications in West Africa.

Given that trade finance is normally short-term, low-risk finance, it is available at low prices in developed
economies. In contrast, trade finance prices can significantly exceed global emerging market benchmarks in low-
income economies. Costs can be exacerbated by poor supplies of foreign exchange in a specific market, as the
majority of trade finance transactions are denominated in foreign currency, notably in US dollars and euros.

A counterfactual analysis suggests that raising the share of trade supported by trade finance from 25 per cent to
40 per cent in both the West African and Mekong regions, and reducing the cost of trade finance to advanced
emerging economies’ benchmarks, would increase annual trade flows in those regions by 8 per cent on average
(Auboin, Bekkers and de Quarti, 2023). In both regions, intra-regional trade would be boosted significantly,
supporting locally-owned economic sectors and supply chains.

makes them viable only for large volumes of transactions, shows that some firms in low-income economies are
meaning that they are often not possible options for willing to double their transport costs to avoid bribery
smaller traders. Trade finance, where available, can help risks, that tariff revenue losses due to tariff evasion are
to mitigate the transactional and financial risks related to highly concentrated among a few firms with the largest
the time gap between production and payment; however, shipments, and that two-fifths of importers report in
firms in many developing economies have limited access a way that increases their tariff liability (Sequeira and
to trade finance instruments (see Box B.4). Djankov, 2014; Anne et al., 2023). This indicates that
Weak rule of law possibly magnifies distortions customs reporting can represent a large burden for
from tariff policy, weighing especially heavy on smaller importers. Electronic customs declarations,
smaller traders. Inconsistent tariff policy application auditing and addressing incentive structures within
by customs officials, who regularly hold up importers customs departments could reduce the administrative
by demanding additional fees to clear transactions, burden, as well as tariff evasion and underreporting of
has been found to create uncertainty that can act as imports and exports (Finan, Olken and Pande, 2017;
an additional trade barrier (Sequeira and Djankov, Carballo et al., 2022; Chalendard et al., 2023; Laajaj,
2014; Atkin et al., 2022). Empirical evidence further Eslava and Kinda, 2023).

- 47 -
The enforcement of intellectual property (IP) down structural transformation that is necessary for
rights can be particularly important to foster sustained growth.
imports of innovative products, and could
Commodity dependence may increase inequality
also stimulate export growth, especially in
in an economy, and consequently hinder
large and middle-income economies. Empirical
economic growth. There is a negative relationship
evidence shows that the implementation of the
between inequality and growth, and the impeding
WTO Agreement on Trade-Related Aspects of
effects are particularly pronounced at low-income
Intellectual Property Rights (TRIPS) can considerably
levels (Amini and Bianco, 2016; Shen and Zhao,
increase trade in innovative products by developing
2023). Extractive commodities are typically capital-
economies, including both increasing imports of
intensive and limit the creation of employment for the
these products from the most innovative economies
broader population. Moreover, revenues from these
and increasing exports of some innovative products
commodities tend to benefit only a small segment of
such as biopharmaceuticals and chemicals (Ivus,
the population. In such an environment, even a positive
2010; Delgado and Kyle, 2022). The positive impact
price shock would hardly translate into broad-based
on exports can be driven by more patent applications
and growth-sustaining higher demand. As a result,
in the local market by foreign companies, incoming
low-income commodity-dependent economies face
FDI and increased intra-firm trade in high-technology
significant challenges in building a sustained middle
intermediates (Maskus and Yang, 2018). However, this
class needed to achieve broad-based economic
impact has mostly been found in large and middle-
growth and sustained poverty reduction. A robust
income economies, with little evidence from small low-
middle class – typically characterized by a relatively
income economies that lack the absorptive capacity to
high material standard of living – increases domestic
incorporate high-technology inputs in their production
consumer demand for goods and services, creating a
and operationalize technologies developed in high-
larger and more stable market (Goldberg and Reed,
income markets (Branstetter and Maskus, 2022).
2023b). This demand can encourage the growth of
(b) S
 pecialization in primary commodities diverse industries beyond extractive commodities,
production without sustained and inclusive fostering economic diversification. The middle class
gains impedes economic convergence can further contribute to economic stability through
more consistent consumption patterns and investment
Economies that depend on a single commodity
in housing, education, and healthcare.
as their main source of exports often struggle to
achieve sustained growth. Although some resource- (i) C
 ommodity price volatility hampers
rich economies have achieved rapid convergence economic development
through commodity exports, many others have lagged
Commodity price volatility hinders investment
behind. As discussed in Section B.1, dependency
and innovation. Volatility is often considered
on primary commodity exports (whether extractive or
to be one of the reasons behind the “resource
agricultural commodities) is a common characteristic
curse” – when an economy rich in valuable natural
of economies that have experienced slow growth
resources, such as minerals, oil, gas and fertile land,
despite relatively high trade participation. In addition,
nevertheless underperforms economically (Van Der
agriculture commodity-dependent exporters, some of
Ploeg and Poelhekke, 2009). The direct positive
which are small and vulnerable economies, tend to
effect of natural resources on growth and long-term
have both low trade participation and slow growth.
development is swamped by the indirect negative
Commodity price volatility and a lack of effect of volatility, which leads to significant income
diversification can be obstacles to economic uncertainty. This negative effect occurs mainly
growth in resource-rich economies. Commodity because of a lack of investment into physical and
dependence can be detrimental to growth and human capital, which stifles productivity growth and
convergence, as it can expose an economy to innovation and, ultimately, the capacity to diversify
commodity price volatility. While an increase in an into modern sectors. Moreover, price volatility in
export commodity price can have a positive impact agricultural commodities can exacerbate poverty, as
on income per capita, there is evidence that volatility food prices disproportionally impact poorer rather than
has a negative impact on long-term growth (WTO, richer economies, and the poor rather than the rich
2003; IMF, 2011; UNCTAD, 2023b). The impact of within those economies. This is because agricultural
commodity exports on other sectors of the economy revenues are the main sources of income among
can also lead to low levels of diversification and slow the poorest populations, and expenditure on food

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TRADE AND INCLUSIVENESS:
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represents a relatively large share of the budget in the to leverage commodity exports sustainably
poorest households. in the development process. The resilience of
public finances in commodity-dependent developing
The pro-cyclical nature of commodity
economies can be enhanced by broadening and
price fluctuations can further undermine
diversifying the tax base, adopting forward-looking
macroeconomic stability. The prices of commodities
budgetary practices, and implementing fiscal rules. The
that are widely used in industrial processes, such
commonly held view is that revenues should not be spent
as copper or oil, fluctuate according to the business
immediately during periods of high commodity prices,
cycle. During economic downturns, prices decrease
but should be put into liquidity funds to accumulate
due to reduced global demand. This aggravates the
savings that would help to protect exporters and the
economic conditions of economies that rely heavily
economy during periods of low prices. For economies
on revenues from exporting these commodities. One
rich in depletable resources, investing revenues in
commodity that differs in this respect is gold, the price
commodity-based sovereign wealth funds can help to
of which typically increases during global crises and
spread the benefits across generations and support
periods of economic uncertainty, as investors often
long-lasting sustainable growth. Chile, for example,
turn to gold as a safe investment asset (Chiang, 2022;
Sharma, 2023). The peculiar characteristics of this combined fiscal rules and sovereign wealth funds to
commodity may explain the mixed performance of manage external shocks, particularly those related
gold-exporting economies.16 to copper price volatility. It has successfully reduced
GDP growth volatility since 1990, maintaining relatively
Governments in resource-rich economies often stable growth even after the 2008-09 financial crisis
struggle to manage the volatile revenue from (Céspedes, Parrado and Velasco, 2014; Solimano and
resource exports. In the absence of appropriate Guajardo, 2018). However, successful implementation
fiscal management, even rising prices of export of these measures hinges on achieving social
commodities can be detrimental to an economy. In fact, consensus, which can be challenging in economies
sudden increases in natural resource wealth can lead with low institutional capacity.
policymakers to escalate public spending in a way that
can become unsustainable once resource revenues (ii) L
 ack of diversification can impede
decline (Marioli and Vegh, 2023). Large revenues from economic growth
oil exports can also dampen commitments to long-term Over-reliance on exports of a single commodity
investments and growth strategies (Venables, 2016). can have an indirect negative impact on
Financial market development is essential other sectors of the economy and inhibit
to mitigate the negative consequences of diversification. This phenomenon is commonly
commodity price volatility. In economies with well- known as the Dutch Disease. It describes the negative
developed financial sectors, the resource curse tends impacts of a rapid increase in revenues from natural
to be less pronounced (Van Der Ploeg and Poelhekke, resource exports, such as oil, gas or minerals, on other
2009). A more financialized commodity market sectors of the economy, particularly manufacturing
dampens the effect of price volatility on real exchange and agriculture, and is named after the experience
rate fluctuations and hence improves macroeconomic of the Netherlands following the discovery of natural
stability. In addition, access to financial instruments or gas reserves in the 1960s. Similarly, in the context
technologies can help commodity producers to insure of low-income economies and LDCs heavily reliant
their revenues against price fluctuations and thus on one specific sector, the Dutch Disease can also
reduce their income uncertainty. Export taxes that soften manifest when a sudden increase in commodity
the impact of rapidly rising world prices in the domestic export revenues, including agricultural products,
market are another instrument used by governments to leads to appreciation of the exchange rate. This, in
insulate their economies from price volatility and raise turn, makes production and exports of other products
revenues, which can benefit domestic consumers. less competitive on the global market, hindering
Nevertheless, many natural resource economists would diversification efforts and leading to over-reliance on
argue that this is a second-best way of addressing a single sector (WTO, 2010). In addition, the influx of
income instability problems, to be used only where the revenue can lead to neglect of other sectors crucial
first-best option of developing efficient financial markets for long-term economic development and employment
is not attainable (WTO, 2010). generation, such as manufacturing and services.

Enhancing the resilience of public finances Furthermore, the market power of large global
and adopting a long-term perspective is crucial commodity buyers can hinder diversification

- 49 -
into higher-quality products by limiting the of industrial policies (Harrison et al., 2010; Choi and
gains from trade for small producers. About 80 Levchenko, 2021). Another prominent issue is the
per cent of global farms are owned by smallholders. presence of cost-discovery externalities whereby the
Large intermediaries connect these small farmers to experiences of firms pioneering a new industry or a
global crop markets and thus reduce their high export new technology generate valuable public information.
barriers. Nevertheless, a rising concentration among Without public incentives, no producer can enter
intermediaries, such as multinational agribusinesses, such activities, and this can delay the adoption
also leads to relatively lower gains from exports for of new technologies or diversification into new
farmers. Empirical evidence from three low-income sectors (Hausmann and Rodrik, 2003; Harrison et
al., 2010). Similarly, coordination failures can inhibit
economies suggests that when global prices increase,
growth in industries relying on the development of a
intermediaries retain most of the higher gains with less
complementary network of firms, or those relying on
than a third of those gains benefiting farmers directly
innovative activities (Rodrik, 2007; WTO, 2020b).
(Dhingra and Tenreyro, 2020). As a result, farmers lose
out in relative terms, despite gaining in absolute terms, Governments use a wide array of inward- and
and have fewer incentives to invest in better technology outward-oriented policies to steer the economy
or to diversify into high-quality, high-yield crops. towards certain sectors and activities. Industrial
policies range from subsidies, tax credits, trade policy
Finally, tariff escalation in export markets can measures and infrastructure projects to education
limit the ability of developing economies to reform. A key feature of contemporary industrial policy
diversify into processed, higher value-added is addressing the information asymmetry between the
products. Tariff escalation refers to a situation in private and public spheres, and ensuring that policies
which tariffs are lower for primary commodities and are designed to be compatible with private sector
increase as products undergo processing. This incentives relating to profitability and competitiveness,
reduces the incentive to industrialize in commodity- which require strong state capacity. In practice, the
exporting economies, and it acts as a disincentive to role of industrial policies in combatting market failures
diversify production (WTO, 2010). Based on most and redirecting economic activities is inherently
recent applied tariffs data, the tariff schedules of difficult to assess, and the evidence remains mixed
large agriculture importers still show signs of tariff (Juhász, Lane and Rodrik, 2023).
escalation. Of the top ten agricultural importers, seven
Export promotion can help domestic firms
impose higher average tariffs on minimally processed to expand into new products and markets.
or processed food products than on raw products.17 Diversifying from commodity exports into more
On the other hand, none of these economies’ tariffs complex goods represents a challenge for producers
increase consistently with the degree of processing. in developing economies because information frictions
are more severe in products whose quality and
In the long term, diversification away from the
characteristics can differ widely across producers.
natural resources sector is essential to support
Reducing these information frictions between foreign
economic development. Diversifying away from
buyers and domestic producers, and helping the latter
the natural resources sector can help to mitigate
to better understand foreign consumer demand and
the risks associated with dependence on a single
regulations through export promotion programmes,
sector and can enhance overall economic resilience.
can contribute to diversification into more complex
Such broader diversification becomes even more products and higher value-added activities (Volpe
necessary if resources are depletable. Moreover, Martincus and Carballo, 2008). Digital connectivity
where commodity extraction and production are and access to the internet play a crucial role in these
highly capital-intensive, diversification can deliver few efforts. Analysis based on 60 developing economies
positive spillovers in terms of employment, and little found that digital connectivity through submarine
potential for aggregate labour productivity growth. cables increased export complexity, especially in sub-
Diversification can address this issue by fostering the Saharan Africa (Cariolle and da Piedade, 2023).
development of other productive sectors, including
Export restrictions appear to be an ineffective
labour-intensive manufacturing and services.
diversification policy. For fiscally constrained
There is growing evidence of the role of governments in economies that are important global
governments in helping economies to diversify suppliers of a raw material, export restrictions on the raw
towards modern sectors. Learning-by-doing material can appear to be an attractive policy to redirect
spillovers that increase an industry’s competitiveness the domestic economy towards processed, higher
as it grows are frequently used to rationalize the use value-added products. Economic theory predicts that

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HOW TO MAKE TRADE WORK FOR ALL B TRADE AND INCOME CONVERGENCE

the imposition of an export tax will lower the domestic (i) P

 oorly functioning capital, labour and
price of the taxed resource compared to global prices. land markets impede adjustment to trade
Thus, domestic downstream producers can access the openness
targeted resource at a lower price, effectively reducing
Poorly functioning capital, labour and land
their cost of production. Rigorous empirical evaluation of
markets slow economic adjustment and
the effects of export restrictions on downstream sectors
structural transformation. Besides trade frictions
is scarce, but case studies of mineral export restrictions
that make commerce with foreign buyers and suppliers
in several African economies suggest that they are not
an effective tool to promote industrial upgrading (Fliess, more difficult, an economy’s ability to take advantage
Idsardi and Rossouw, 2017). The evolution of exports of trade also depends on its ability to adjust. If capital
and revealed comparative advantage in downstream and workers cannot easily move between firms, sectors
sectors shows little correlation with the presence of and regions, then the economy cannot adjust to trade –
export restrictions, and is accompanied by negative import-competing firms cannot shrink, while exporting
consequences for the comparative advantages of firms cannot grow. The economy’s adjustment to lower
targeted primary industries. trade costs is therefore constricted and the growth of
imports and exports dampened.
Successful industrial policies tend to hinge
on the complementarity of various domestic Capital frictions are a prevalent issue in
policies. Among the factors influencing the feasibility developing economies, and prevent the efficient
of domestic value addition are the capacity of allocation of investment among firms. While low-
downstream sectors, or the incentives to increase income economies reached similar levels of domestic
this capacity over time (Warwick, 2013; Juhász capital market liberalization to upper-middle-income
and Steinwender, 2023). In the case of poor but economies, they still lagged behind high-income
resource-rich economies, a lack of skills, unstable economies (Djankov, McLiesh and Shleifer, 2007;
power supplies and insufficient levels of transport IMF, 2019). This type of obstacle can have important
infrastructure can create obstacles to the development industry and aggregate implications for how firms
of local processing capacity, while political instability and economies respond to trade shocks. When
and uncertainty about the business environment there are significant obstacles involved in downsizing
can hamper international investment (Mobbs, 2011; and closing down firms, import-competition shocks
Ouédraogo, Ouédraogo and Lompo, 2020). Overall, can lead to temporary aggregate productivity losses
implementing market reforms and policies that facilitate (Lanteri, Medina and Tan, 2023). On the flip side,
the movement of workers and capital between firms capital stranded in import-competing firms limits the
and sectors, improve the business environment, and ability of exporting firms to expand. Hence, reducing
help to attract foreign investment and technology, capital frictions would improve the ability of firms
can help to develop a more diversified economy and in developing economies to adapt to new market
can maximize the gains from trade participation, as conditions and help them better realize the gains from
discussed in the next section. trade liberalization. Underdeveloped financial markets
can also prevent firms from selling to and sourcing
(c) D ifferent domestic barriers can hinder
the maximization of the gains from trade from foreign markets. Importing and exporting requires
paying substantial fixed costs up front, and to fund
Domestic institutions and policies that reduce these fixed costs, firms often rely on external financing
economic efficiency and slow structural (Das, Roberts and Tybout, 2007; Manova, 2013; Foley
transformation also reduce the potential of trade and Manova, 2015). Credit constraints can therefore
to accelerate economic growth. Capital and labour limit the ability of otherwise competitive firms to
market frictions that hamper an efficient allocation of expand into new markets.
resources can slow the economy’s adjustment to trade
and reduce the gains from trade. Domestic policies that Migration frictions and skills mismatches can
improve the business climate, infrastructure quality, significantly hinder labour mobility in developing
the skills of the workforce and the competitiveness economies, slowing economic adjustment to
of local firms can increase domestic investment and trade. While formal labour market institutions are not
productivity. The benefits can be amplified in an open a major obstacle to labour mobility in most developing
economy in which these reforms also encourage FDI economies, empirical studies from large emerging
and maximize the gains MNEs can bring in terms of economies point to substantial migration obstacles
technology diffusion, economic upgrading and access that prevent workers from moving away from regions
to global markets. with declining labour demand towards expanding

- 51 -
regions (Topalova, 2010; Kovak, 2013; Bell et al., up production. By establishing a clear legal framework
2015; Dix-Carneiro and Kovak, 2017; Erten, Leight and for land policy and enforcing land rights, governments
Tregenna, 2019). As discussed in Chapter C, workers could address this issue and support productivity
face important mobility costs when switching sectors. growth and diversification.
These costs vary significantly across economies,
(ii) B
 arriers to FDI and technology transfer can
but tend to be larger in economies that are poorer
impede productivity growth and innovation
and have less developed labour market institutions
(Dix-Carneiro, 2014; Artuç, Lederman and Porto, Trade and FDI are inherently linked, and so are
2015). The factors that constrain labour mobility, trade and investment policy. MNEs set up foreign
especially in developing economies, are not yet well production activities for various economic reasons – to
understood. Besides migration frictions and labour be closer to a large consumer base, to access natural
market institutions that reduce flexibility, workers resources or technology, or to increase the cost
may face high costs of searching for employment efficiency of their production process. But irrespective
opportunities, and difficulties in adjusting their skills to of the main driver of FDI, MNEs engage more in
the demands of growing sectors. Empirical evidence importing intermediate inputs and in exporting their
also suggests that a combination of migration frictions products than their local counterparts. Openness to
and imperfect capital markets can exacerbate the trade and economic integration with regional partners
distributional effects of trade. This is further discussed are also therefore major determinants of FDI, which
in Chapter C. in turn drives participation in GVCs and economic
upgrading.
Labour cost distortions in low-income economies
are higher for firms using modern technologies, FDI restrictions in manufacturing are relatively
which slows down trade-induced technology low compared to other sectors. The OECD FDI
adoption. As discussed in Section B.2, better access regulatory restrictiveness index provides a glimpse
to intermediate inputs incentivizes the adoption of into the degree of statutory restrictions on FDI across
modern, intermediate input-intensive technologies, all sectors of the economy, including foreign equity
thereby raising aggregate labour productivity. Based limitations, discriminatory screening or approval
on firm-level data from the World Bank Enterprise mechanisms, restrictions on the employment of
Survey, a recent study suggests that distortionary foreigners as key personnel, and other operational
regulations and taxes on labour are more prevalent restrictions, such as restrictions on capital repatriation
in developing economies, especially for larger firms or on land ownership by foreign-owned enterprises.
(Farrokhi, Lashkaripour and Pellegrina, 2024). Since Based on information for 39 high-income, 25 upper-
the adoption of modern technologies is typically driven middle-income and 16 lower-middle-income economies,
by large firms, these labour market distortions hamper the FDI index shows that restrictions in the secondary
productivity gains from trade-induced technology sector (especially in manufacturing) are relatively low
adoption. Using a quantitative model, the study compared to agriculture, mining and service sectors
suggests that labour market distortions erode, on (see Figure B.9).
average, one-third of the potential labour productivity
Middle-income economies remain relatively less
gains from trade among low-income economies.
open to FDI than high-income economies. The
An additional barrier to trade adjustment and FDI index also shows that restrictions on FDI inflows
productivity growth, which affects mainly decrease with income level. That is despite significant
smallholder farmers, is related to land rights progress in liberalizing FDI regulations between 2014
and land acquisition. Expanding production and and 2020 in lower-middle-income economies, which
improving productivity in the agriculture sector can lowered the group’s average restrictiveness index by
involve investment in technology and in high-value and 20 to 30 per cent. Restrictiveness in upper-middle-
high-quality product varieties. However, inadequate income economies, on the other hand, declined little
land registries and weak legal systems are often during that period. A drawback of the FDI index is
cited as one of the institutional barriers that hinder that it lacks data for low-income economies. Some
investment in agriculture-dependent LDCs. This issue information for this group can be gauged from the
is particularly severe in post-conflict regions where, World Bank-WTO services trade restrictions index
due to forced displacement and the loss of title deeds, which scores barriers to establishment of foreign
customary and statutory land tenure systems may not presence for a range of services sectors. The index
coincide. Without clear land titles, smallholders are shows that, on average, low-income economies have a
often unable to secure financing to improve and scale similar level of restrictions to that of the lower-middle-

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Figure B.9: Higher FDI regulatory restrictiveness in lower-income economies, 2020

0.21 0.21

0.20

0.17
0.16
FDI regulatory restrictiveness index

0.15

0.10 0.10

0.07 0.08
0.06
0.05
0.03

0.00
Agriculture and mining Manufacturing Services
Lower-middle-income economies Upper-middle-income economies High-income economies

Source: Authors’ calculations, based on OECD data on FDI regulatory restrictiveness.

Note: The figure shows the average FDI regulatory restrictiveness index in 2020 by sector and income group. The regulatory restrictiveness
index varies between zero and one. The analysis is covers 80 economies, including 25 upper-middle-income and 16 lower-middle-income
economies. The income groups are based on the 2020 World Bank classification.

income group, but LDCs, which are in both income Finally, measures targeting coordination failures within
groups, exhibit the highest level. sectors, information asymmetry between foreign
and local investors and complementary policies
Improving local workforce skills, infrastructure,
like financial market development are essential for
the business climate and the competitiveness
promoting, attracting and maximizing the benefits of
of local supply chains helps to attract FDI and
FDI (Harrison et al., 2010; Bilir, Chor and Manova,
maximize its benefits to the local economy.
2019).
Aside from the size of the market and direct barriers
to FDI, other factors are important for attracting A robust IP regime can also attract FDI by
investment. Evidence suggests that foreign investors providing multinational corporations with
are more concerned with improvements to transport the confidence that their investments will be
and logistics, access to skilled workers, technicians protected. Companies are more likely to invest in
and managers, and business climate reforms than economies where their IP rights are enforced, as this
with direct subsidies, tax breaks or subsidized reduces the risk of unauthorized use or imitation of their
inputs. Moreover, promoting entrepreneurship to technologies and products (Maskus, 2000). Moreover,
create competitive supply chains of local firms in the Branstetter et al. (2006) found that patent law changes
host economy generates both incentives for MNE in emerging economies with US affiliates led to a rise
establishment and the potential for positive spillovers in royalty payments to US parent firms due to increased
from MNE activity (Freund and Moran, 2017). Foreign volume of technology sales and a significant increase
firms will only transfer advanced technology to their in R&D investments at local subsidiaries, particularly in
subsidiaries if the skills of the local workforce and high-technology industries.
the level of sophistication of their local suppliers and Investment facilitation has become an important
customers make such transfer profitable. Furthermore, policy tool for attracting FDI. To enhance their
they will invest in capabilities of local suppliers only attractiveness to FDI, developing economies have
if the technology gap is not too large (Branstetter been adopting measures that improve the business
and Maskus, 2022). Local content requirements that environment, simplify administrative procedures
aim to foster linkages with domestic firms have a and help investors access information. Investment
mixed record, often discouraging foreign investment facilitation policies have become a complementary
rather than maximizing its benefits, especially in small tool to help economies to achieve their investment
markets without the skills and expertise that can objectives, including by reducing information
substitute for imported products (World Bank, 2020). asymmetry, lowering transaction costs for investors

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and undertaking the aftercare of investors (Sauvant, include import/export duty exemptions, streamlined
2015; OECD, 2018). Investment promotion agencies customs procedures and low tax rates (Monga, 2017).
can play an important role, for example by monitoring For instance, Costa Rica’s 2010 reform of the Free
and actively working to improve an economy’s Trade Zone Regime was undertaken with the aim of
investment climate (de Crombrugghe, 2019). However, enhancing foreign investment and promoting productive
analysing the effectiveness and impact of investment linkages, particularly in sectors like medical equipment
promotion agency activity remains challenging (López and devices (Salazar Xirinachs, 2022). The reform was
and García, 2020). accompanied by a proactive stance on FDI through
Where improving infrastructure and regulatory institutional support, workforce training programmes
environment at the country level requires a leap, and R&D collaborations (Martinez and Padilla, 2017;
special economic zones (SEZs) can serve as a Monge-González, 2017). Costa Rica’s export and
stepping stone. SEZs have been used successfully investment promotion agencies have played crucial
to diversify exports and stimulate economic activity by roles in attracting and assisting companies, offering
circumventing business environment challenges and comprehensive support and strengthening local supplier
experimenting with new policies (UNCTAD, 2021b). integration. However, while several SEZs in Southeast
They provide special incentives and infrastructure Asia have also been an integral part of successful
to attract foreign direct investment and improve the outward-oriented policies, in many African economies
competitiveness of local firms. Policy incentives typically they have failed to deliver similar results (see Box B.5).

Box B.5: The challenges of using SEZs to improve trade participation and attract FDI in Africa

While African economies have historically been considered latecomers to the adoption of SEZs, the
continent is now witnessing a widespread proliferation of these zones, with Kenya, Nigeria, Ethiopia and
Egypt leading the way, and East Africa emerging as a hotspot for SEZs (UNCTAD, 2021b). Despite this
growth, the experience with SEZs in Africa has been mixed. Many African SEZs host only a few firms and
make limited contributions to national employment, except in economies like Djibouti, which are strategically
located along major trade routes (UNCTAD, 2021b). Furthermore, most African economies have struggled to
achieve significant structural transformation through SEZs, with limited benefits in technology transfer and
skills upgrading (Farole, 2011; Farole and Moberg, 2017).

Due to limited government financial resources and poor institutional design, SEZs in Africa often fail to tackle
the broader economic challenges of high factor and transaction costs, the lack of basic infrastructure and
ineffective policies (Monga, 2017). In addition, political capture and rent-seeking, resulting in suboptimal
location choices and firm selection, further exacerbate the underperformance of these zones.

Solutions proposed in the literature include aligning development and SEZ strategies with potential
comparative advantages, promoting competitive firms with effective backward linkages, and developing
cluster-based industrial parks where economies of scale, intra-industry knowledge spillovers, shared
supplier and customer bases, good supply chains and logistics, and other agglomeration effects can be
achieved (Farole and Moberg, 2017; UNCTAD, 2021b; Malindini, 2022). Success hinges on effective
institutional arrangements, infrastructure development, and policy improvements that foster industry clusters
and enhance vertical integration. Drawing lessons from the successful experiences of economies such as
Ireland and the Republic of Korea, African economies could enhance their SEZ performance by improving
the productivity of local suppliers through improved administration of duty-free access to imported inputs
(Monga, 2017).

Overall, political commitment to good governance and effective policy implementation at the highest levels
of government is essential to signal to potential investors that constraints on doing business in SEZs are
being addressed. The implementation of the African Continental Free Trade Area, addressing both rules of
origin and economies’ flexibility concerning SEZ regulation (Chi, 2021), may further help to capitalize on the
opportunities of enhanced regional integration in Africa.

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4. Future opportunities for developing economies and LDCs projected to bear

the brunt of the impact (Goes and Bekkers, 2022). A
economic convergence lie decoupled global economy could also reduce market
in strategies to keep trade scale, discourage investment and hamper knowledge
open and supported by exchange, posing significant demand-side constraints
for sustained economic growth and poverty reduction,
complementary policies
especially for low- or lower middle-income economies
(a) F
 uture economic convergence faces risks that do not have domestic markets large enough to
from emerging global trends experience sustained poverty reduction (Goldberg and
Reed, 2023a).
Emerging global trends such as geopolitical
tensions, digital revolution and climate change Furthermore, geopolitical tensions threaten
are reshaping the landscape of trade-led established GVCs, leading to efficiency losses
development. While these trends may threaten future and increased production costs. Research
economic convergence, they may also present new suggests that a full shutdown of GVCs, with no
opportunities for re-globalization, or increased global international trade in intermediate goods, could
cooperation. The lessons from the past three decades reduce welfare in all economies by between -3 and
provide important insights for the future. Notably, -68 per cent, with small, highly integrated economies
technological innovations can reduce costs in services experiencing the largest welfare losses (Eppinger et
trade and lead to more efficient and sustainable al., 2021). Finally, geopolitical tensions can undermine
production methods, and global efforts to combat collective efforts to address major global challenges,
climate change can foster international cooperation such as climate change and food security, and the risks
and green investments. The future of trade-led of conflict escalation resulting from these tensions
development will hinge on policy choices that manage exacerbate humanitarian crises.
these risks while leveraging new opportunities to foster
While efforts to diversify can benefit certain
inclusive and resilient economic growth.
economies, achieving global convergence
(i) G
 eopolitical tensions pose challenges remains elusive in light of geopolitical tensions.
for economic convergence Recent data reflecting trade tensions between China
and the United States also suggest reallocation within
The rise in geopolitical tensions and trade
global supply chain activities. While direct sourcing
fragmentation has been a prominent feature of
from China by the United States has declined, there has
recent years. The global economic dynamics have
been a noticeable uptick in import shares to the United
been impacted by various events, such as the China-
States from low-wage regions such as Viet Nam, as
United States rivalry, the war in Ukraine and conflicts
well as from nearshoring alternatives, notably Mexico
in the Middle East. This period has also marked an
(Alfaro and Chor, 2023). Trade tensions between
increase in trade sanctions and the appearance of new
China and the United States have led to trade being
forms of trade weaponization (i.e., interference with
displaced to other economies, and export growth was
open trade for geopolitical reasons), undermining the
stronger, on average, in economies with larger shares
relative stability that underpinned economic growth
of their exports governed by strong trade agreements,
in the past three decades. Increasingly, trade and
and in economies with more FDI (Fajgelbaum et al.,
economic policies are influenced by national security
2021). These findings suggest that some economies
concerns, characterized by “friend-shoring” policies,
may benefit from geopolitical tensions. However,
export controls, restricted trade and technology flows
these benefits are insufficient for achieving long-
(including through export control), discriminatory
term economic convergence. Simulations based on
sectoral and security-motivated trade agreements and
the WTO Global Trade Model show that, in a “partial
calls for self-sufficiency.
rivalry” scenario where some developing economies
Geopolitical tensions pose significant challenges and all LDCs remain neutral and do not impose higher
for economic convergence. WTO simulations trade costs on either bloc, on average there would
indicate that, in a decoupling scenario, if all economies be a 2.8 per cent loss in world GDP in 2050 relative
were to align themselves either to an Eastern or to a to 2019. Although LDCs might benefit from avoiding
Western self-contained trading bloc, global trade alignment, their GDP growth would still fall short of
could drop by 13 per cent and technological spillovers achieving significant global economic convergence
could be hindered (WTO, 2023c), potentially due to limited knowledge diffusion and productivity
resulting in losses exceeding 5 per cent of GDP, with growth in the long term (Métivier et al., 2023).

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(ii) D
 igital revolution enables new seen their export value added increase significantly
opportunities for services trade-led since 2005, and these services also exhibit strong
development domestic linkages, facilitating productivity spillovers
(Nayyar, Hallward-Driemeier and Davies, 2021).
The increased capital and skill intensity of
Transportation, telecommunications, finance and
modern manufacturing has reduced the scope
business services are increasingly utilized as
for manufacturing-led growth in low-income
intermediate inputs in goods production and export.
economies. Historically, economic growth has
This makes services exports a particularly attractive
been accompanied by a transition from agriculture to
pathway for developing economies.
manufacturing, and then eventually from manufacturing
to services (Herrendorf, Rogerson and Valentinyi, Trade in digitally deliverable services, in
2014). The labour-intensive nature of manufacturing in particular, has seen accelerated growth,
the past played a significant role in economic growth. including in low-income economies. Digitally
Manufacturing provided jobs for many, including a deliverable services include services that can be
relatively unskilled workforce, driving urbanization traded through computer networks, such as the
and reducing rural unemployment. The labour- internet, apps, emails, voice and video calls, and
intensive nature of manufacturing also facilitated digital intermediation platforms. Although some low-
skills development, increased wages and stimulated income economies are still lagging behind in exports
consumer demand, further fueling economic growth of digitally deliverable services, several economies
and diversification. However, although today’s large have registered significant growth. Ghana, Morocco
formal manufacturing firms account for a sizeable and South Africa were responsible for more than half
share of manufacturing production, they represent of African exports of digitally deliverable services
only a small share of manufacturing employment in in 2022, and in these three economies, along with
many low-income economies. This reflects the trend Madagascar, growth since 2015 has surpassed that
in modern manufacturing towards higher capital and of the global average, primarily driven by business
skill intensity, and therefore much less low-skilled process outsourcing and IT services (World Bank and
employment. This represents an increasingly salient WTO, 2023b).
obstacle to manufacturing-led growth in low-income
Furthermore, services and digital technologies
economies (Rodrik, 2013; 2016; Diao et al., 2021).18
can facilitate structural transformation and
Services trade can enable new trade-led technology diffusion. Digital technologies can
development opportunities for low-income help to overcome information gaps associated
economies. Qualities traditionally associated with with employment or financial transactions, thereby
manufacturing, such as scalability and innovation, are improving labour efficiency and the promotion of
increasingly found in certain services sectors, making technology spillovers. For example, several studies
them pivotal for development (WTO, 2019). As a result, have found that digital economy policies in China
labour productivity in services has been shown to have helped regional industrial structure upgrading
exhibit unconditional convergence during the period (Wu and Shao, 2022; Yang, 2023). Similarly, business
1975-2012 in large number of economies (Kinfemichael consultancy services from a large international
and Morshed, 2019). It has been argued that the future consulting firm have been found to substantially help
of developing countries is in services as that that is factories in developing economies to reduce product
where the jobs will be (Rodrik and Sandhu, 2024). defects and inventories and to increase output (Bloom
et al., 2013). Learning systems driven by artificial
The rise of digital technologies has transformed
intelligence (AI) can accelerate the development of
the trade landscape, making services more
fundamental human skills by enabling individualized
tradable. Digital technologies can reduce trade
learning at relatively low cost (Muralidharan, Singh and
costs by optimizing logistics and reducing translation
Ganimian, 2019).
and searching costs. In particular, ICT technologies
are making it possible for services to be delivered Quantitative analysis shows that digitalization
even when service providers and consumers are can lead to substantial trade growth, especially
not in proximity. Consequently, trade costs in some in low-income and lower-middle-income
services sectors are now comparable to those in the economies. A quantitative analysis using the WTO
manufacturing industry (Gervais and Jensen, 2019). Global Trade Model offers insights into how three
Within the services sector, professional, scientific, key trends in digitalization could shape long-term
technical, ICT, financial and insurance services have trade patterns by 2040: (i) AI-driven productivity

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increases; (ii) lower trade costs due to digitalization, Signé). AI-related productivity growth depends on an
including streamlined customs procedures, better economy’s readiness for implementation, and high-
logistics, language translations technologies, online income economies are generally better prepared due
sales (e-commerce) and less need for face-to-face to their existing digital infrastructure and skilled labour
interaction; and (iii) changes in trade costs related to force. Moreover, automation, robotics and other labour-
data policies (Bekkers, Kalachyhin and Teh, 2024). As replacing technologies risk devaluing the sources of
shown in Figure B.10, AI-driven productivity increases comparative advantage of many developing economies,
and reductions in trade costs could have significant and deteriorating their terms of trade, potentially
impacts on trade growth, especially in low-income and contributing to divergence (Korinek and Stiglitz, 2021).
lower middle-income economies. In this context, the share of trade based on labour-cost
New digital technologies offer significant arbitrage, particularly in labour-intensive manufacturing,
opportunities for global trade. Developing dropped from 55 per cent in 2005 to 43 per cent in
economies can leverage digitalization to adopt new 2017 (Lund et al., 2020). Furthermore, geopolitical
technologies and reduce trade costs to levels similar tensions could lead to more restrictive data policies,
to those in developed economies, particularly in increasing trade costs and hindering trade integration in
logistics and digital connectivity. By enabling cross- data-related goods and services.
border trade for services that have traditionally Policies can play a crucial role in enabling
needed face-to-face interaction, digital technologies low-income economies to catch up in driving
are likely to reduce the cost of trading in services, projected trade growth in digitally deliverable
allowing low-income economies to better exploit their services. To illustrate the trade impact of different
cost advantages in digitally deliverable services. In policy choices, the quantitative analysis distinguishes
addition, international cooperation in data policies to
between two scenarios: (i) a convergence scenario,
balance data flow and safeguards would allow some
which features greater productivity growth and
developing economies to lower their trade costs and
trade cost reductions for low-income economies; all
enhance their participation in global production.
economies adopt “open safeguard” data policies,19 and
However, several factors may impede the (ii) a core scenario with uniform productivity and trade
developmental benefits of digital technologies, cost changes across all economies and restrictive data
requiring policy responses. The existence of a digital policies in transactions between economies in different
divide in infrastructure and skills threaten the ability of geoeconomic blocks. Under the convergence scenario,
low- and middle-income economies to engage fully in the average annual trade growth of digitally deliverable
these new opportunities (see opinion piece by Landry services in low-income economies is projected to be

Figure B.10: Positive impact of digitalization on global average annual trade growth, 2017-40
6%
Average global annual trade growth

5%

4%

3%

2%

1%

AI-driven productivity increase Digitalization-driven Digital policies-driven

trade costs reduction trade costs reduction

Baseline scenario Digitalization scenarios

Low-income economies Lower middle-income economies Upper middle-income economies High-income economies

Source: Authors’ calculations, based on Bekkers, Kalachyhin and Teh (2024).

Note: The figure shows the global average annual trade growth by 2040 by income group under four scenarios. The analysis, based on the WTO
Global Trade Model, considers (i) a baseline scenario without digital technologies, (ii) a scenario assuming AI-drive productivity increase; (iii) a
scenario with digitalization-driven trade cost reduction scenario; and (iv) a scenario assuming changes to trade costs related to data policies.
The income groups are based on the 2022 World Bank classification.

- 57 -
 Opinion piece

Leveraging trade to foster a more

inclusive digital economy in Africa
By Landry Signé
Senior Fellow – Global Economy and Development Program, Africa Growth Initiative, Brookings Institution;
Executive Director and Professor, Thunderbird School of Global Management;
Co-Chair, World Economic Forum Regional Action Group on Africa

The spread of emerging and digital technologies, also inclusive digital economy, as most of these are produced
called the Fourth Industrial Revolution, is drastically outside of Africa.
affecting trade, economic competitiveness and
Trade policies and agreements can offer specific
development, including in Africa (Signé and Ndung’u,
mechanisms to help bridge the digital divide. For example,
2020; Signé, 2023a). Global exports of information and
they can advance an inclusive digital economy by
communications technology (ICT) services increased at
including provisions that facilitate trade in areas related
an average annual rate of 8 per cent between 2005 and
to the digital economy, and by removing barriers to digital
2016, and revenues for e-commerce, another prominent
products and services that facilitate the adoption of digital
feature of the digital economy, reached US$ 25.6 trillion in
infrastructure and measures. Removing such barriers
2018. A striking feature of e-commerce trade is its uneven
would lower the cost of goods and services (e.g., internet
distribution across countries: China alone makes up 23 per
infrastructure, access to networks, digital devices,
cent of total e-commerce trade, while the top 10 advanced
information and communications technology equipment),
economies made up 75 per cent of the total. In contrast,
which could help to accelerate the development of
more than 75 per cent of the world’s adult population has
African digital economies.
no access to e-commerce (UNCTAD, 2017).
Such provisions can also help unlock investment to
African economies and populations face a significant
facilitate physical, technological, socio-demographic
digital divide that limits their participation in the globalizing
and cognitive access for African economies to
digital economy. Less than one-third of Africans have
digital technologies, thus allowing a sustained digital
access to internet connections (ITU, 2019). The costs of
presence and effective and productive usage of digital
this digital gap were apparent during the recent COVID-19
technologies. This is particularly important given the
pandemic, when African economies struggled to sustain
variation of levels of education, income and access
remote working and virtual schooling. In Nigeria, for
to information, technology literacy and resources that
example, virtual education proved infeasible during the
leave some people and economies excluded from full
period of lockdown, with only one third of the country’s participation in the digital economy.
primary and secondary school students engaging in
virtual education. Another example is the adoption of provisions that
enhance flexibility for digital measures, affirming the policy
Africa’s digital divide could further widen with the space to adopt digital measures. The African Continental
inevitable maturity of disruptive digital technologies Free Trade Area Protocol on Digital Trade provides an
including artificial intelligence, cloud computing, big illustration of such mechanism. It aims to harmonize digital
data, the Internet of Things, high-speed broadband, trade in Africa, with provisions related to market access,
blockchain, autonomous vehicles and 3D printing (Signé consumer trust, facilitating digital trade, treatment of
and Ndung’u, 2020). African countries have a narrowing digital products, and data governance, and it is inclusive
window of time to bridge the digital divide and strengthen of provisions guaranteeing duty-free digitally delivered
their competitiveness to capitalize on the opportunities services within Africa. The Protocol also allows for the
offered by the growing digital economy (Signé, 2020). creation of exceptions from trade-restrictive provisions
Among other things, this will require fixing the continent’s implemented for legitimate digital objectives; for example,
digital skill gap and mismatch, and building its digital it allows for not implementing duties on digitally delivered
competitiveness to international standards (Signé, 2023b). services from third-party economies under certain
circumstances, subject to rules of origins, in order not to
To unlock Africa’s digital economy, it is necessary to
slow the development of an inclusive digital economy, for
foster the enabling environment and to leverage physical,
example by harming smaller businesses.
digital, human, agility, perception and technology capitals.
African countries therefore have the unique opportunity
to leverage trade and trade policies to foster a more Disclaimer
inclusive digital economy.
Opinion pieces are the sole responsibility of their
Trade facilitates access in Africa to emerging and digital authors. They do not necessarily reflect the opinions
technologies and to the infrastructure needed for an or views of WTO members or the WTO Secretariat.

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11.7 per cent, compared to 7.0 per cent under the core disproportionate effects on certain geographic
scenario (see Figure B.11). Nonetheless, the growth regions. Low-income economies that already face
rate of digitally deliverable services remains higher in economic hardship may encounter exacerbated
low-income economies compared to middle and high- challenges due to diminished productivity resulting
income economies in both scenarios. from rising temperatures and climate-related natural
disasters. These events can disrupt livelihoods,
Thus, although digitalization offers substantial
damage infrastructure, and impede growth prospects
opportunities for developing economies through
(WTO, 2022). Empirical evidence suggests that,
service exports, it also presents challenges.
while the productivity of wealthy economies may not
Developing economies have already made important
be severely impacted by temperature rise, the same
inroads in leveraging services trade, but much remains
factor causes macroeconomic productivity declines
to be done to fully realize the sector’s development
in poorer economies (Dell, Jones and Olken, 2012).
promise. Moreover, international cooperation is
Recent research indicates that the world economy
essential to provide greater transparency and
faces a 19 per cent income reduction over the next
predictability to services trade regimes, mitigate
26 years, regardless of future emission choices, with
identified drawbacks such as winner-takes-all
the greatest damage in regions already experiencing
dynamics and data flow restrictions, to ensure inclusive
higher temperatures and greater economic vulnerability
access to digitalization and its benefits for developing
(Kotz, Levermann and Wenz, 2024). In addition to
economies (World Bank and WTO, 2023a).
economic costs, climate change can also exact a direct
(iii) C
 limate change is a threat to convergence, human toll, and could potentially cause 6 million more
but new opportunities are emerging from the deaths per year by 2100 if the emission trajectory is not
green transition altered, a figure which exceeds all current deaths from
infectious diseases combined (Carleton et al., 2022).
Climate change and other environmental
challenges can significantly impact income Furthermore, climate change can influence
convergence, primarily through their income convergence by reshaping the economic

Figure B.11: Higher export growth in digitally deliverable services under a convergence scenario,
2017-40

4.5%
High-income economies
4.3%

6.2%
Upper middle-income
economies
7.2%

6.1%
Lower middle-income
economies
7.9%

7.0%
Low-income economies
11.7%

0% 2% 4% 6% 8% 10% 12%
Average annual trade growth of digitally deliverable services
Core scenario Convergence scenario

Source: Authors’ calculations, based on Bekkers, Kalachyhin and Teh (2024).

Note: The figure shows the average annual growth rate of trade in digitally deliverable services by 2040 by income group under two scenarios.
The analysis, based on the WTO Global Trade Model, considers: (i) a core scenario with uniform productivity and trade cost changes across
all economies and restrictive data policies, and (ii) a convergence scenario featuring greater productivity growth, trade cost reductions for low-
income economies and “open safeguard” data policies.

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structure of regions. Industries dependent on advanced and emerging economies introduce
natural resources, such as agriculture, forestry and subsidies in green industries to promote sustainable
fisheries, may experience decreased productivity practices and technologies, these measures can leave
or heightened risks due to climate change impacts. lower-income economies at a disadvantage due to their
Conversely, regions specializing in climate-resilient limited financial capacity to provide equivalent support.
sectors like renewable energy may see opportunities This disparity may make lower-income economies less
for economic growth. attractive as investment destinations. There is concern
that, like agricultural subsidies that have traditionally
Meanwhile, climate change and the green
depressed prices and distorted markets, extensive
transition offer opportunities for low-income
subsidies in green and other industrial sectors could
economies. Many low-income economies are situated
similarly hinder development opportunities in the
in geographical regions with significant renewable
future. Unless the diffusion of the green technologies
energy potential, such as solar power, presenting an
driven by support measures in advanced and emerging
avenue to generate and export renewable energy or
economies spread to lower-income economies, the
energy-intensive goods and service. For instance,
gap in access and adoption of sustainable solutions
Kenya has leveraged its abundant geothermal energy
may widen.
to attract investment to build a low-carbon data centre
(Anton, 2024b). In addition, the increasing demand (b) V
 arious strategies can contribute to enhance
for clean energy goods for the green transition is trade-led development in the future
expected to boost demand for critical minerals. Over
In light of the global trends, re-globalization
the past two decades, annual trade in energy-related
can be an important driving force for future
critical minerals, such as cobalt, copper, lithium, nickel
economic convergence. Re-globalization entails
and rare earths, has surged from US$ 53 billion to
extending trade integration to more economies, people
US$ 378 billion (WTO, 2024b). Many developing
and issues. The diversification of GVCs would allow
regions possess reserves of these critical minerals.
economies a chance to engage in globalization more
Africa accounts for over 40 per cent of global reserves
extensively. As mentioned above, digital technologies
of cobalt, manganese and platinum – key minerals for
can allow economies with strong connectivity and
batteries and hydrogen technologies. The Democratic
skills to use emerging opportunities in services trade
Republic of the Congo, Mozambique and South Africa
to drive development, and economies endowed with
have a significant share of global production today,
renewable energy and natural resources stand to gain
but many other economies may hold undiscovered
from trade prospects arising from the green transition.
deposits (IEA, 2022).
To seize development opportunities amid these
Uncoordinated trade policies addressing
trends, a comprehensive approach entails
environmental concerns can present cost
implementing various domestic and trade
challenges for exports from developing
policies. As summarized in Table B.2, and following
economies. Without coordinated climate policies,
the lessons from the past discussed above in this
governments may resort to imposing border
chapter, a range of strategies can help developing
adjustment measures to address carbon leakage
economies capitalize on future trade opportunities by
and competitiveness concerns (WTO, 2022).
tackling trade costs, promoting diversification based
Several studies find that carbon border adjustment
on comparative advantages, and maximizing trade
mechanisms could reduce exports from developing
growth dividends by facilitating technology transfers.
economies and lower their income (UNCTAD, 2021a;
AFC and Firoz Lalji Institute for Africa, 2024). In (i) O
 pen trade is essential to enhance
addition, many governments are implementing policies resilience and technology diffusion
to enhance trade sustainability, including regulations
Keeping trade open is essential to mitigate
mandating that imports meet specific sustainability
the risks of trade fragmentation and promote
standards, which can involve extensive diligence along
economic development. For low-income and small
the value chain. Some WTO members argue that such
open economies, keeping trade open and avoiding
due diligence standards are costly to comply with and
geopolitical alignment are necessary to maintain the
prohibit small enterprises from participating in trade.
benefits of trade. Multilateral mechanisms are vital to
The proliferation of green subsidies, while avert trade conflicts and guarantee lasting economic
accelerating the green transition, could security. As elaborated in Chapter D, prioritizing the
disadvantage lower-income economies. As reinforcement of the multilateral trading system is the

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Table B.2: Opportunities, challenges and strategies to enhance trade-led development

Opportunities and challenges Strategies

Keeping trade open is essential; support for

Geopolitical tensions pose significant challenges
diversification of supply chains can enhance
for economic convergence, putting at risk past
resilience, foster technology diffusion and help
achievements as well as the prospects for those
overcome demand-side constraints in developing
who have been so far left behind.
economies.
New digital technologies offer significant Overcoming trade costs requires addressing
opportunities for global trade, especially in the digital infrastructure and skills gap, open
services. Development opportunities hinge on services trade policy and enhancing regulatory
economies’ digital readiness and policy choices. capacity.
Developing economies abundant in renewable
Climate change and other environmental energy sources and critical materials
challenges can significantly impede income underpinning the environmental transformation
convergence, while the green transition can may leverage their comparative advantage to
offer new export opportunities. enter green supply chains, but also need robust
institutions to avoid the “Dutch Disease”.

most effective path toward nurturing sustainable and technology adoption include disseminating information
inclusive long-term development. about available technologies, such as through learning
from other firms via GVCs (Comin and Mestieri, 2013;
Open trade also bolsters economic resilience
Cirera, Comin and Cruz, 2022).
against shocks from policy changes and natural
disasters. Trade helps to diversify access to global (ii) H
 arnessing new services trade
goods and services, enabling economies to pivot opportunities requires addressing
to alternative suppliers amid disruptions from policy trade costs and implementing relevant
changes, natural disasters or other unexpected complementary policies
shocks. Diversification, in terms of cultivating a
In order to reduce trade costs in the digital age,
broader and more varied network of trading partners,
economies are required to tackle the digital
promotes overall economic resilience, albeit at the
infrastructure and skills gap through significant
expense of higher costs. Furthermore, firms engaged
in trade, and particularly exporters, are more likely investments. Numerous studies have highlighted the
to survive economic downturns due to their higher positive impact of the internet on export growth (Freund
average productivity and access to diversified and Weinhold, 2002, 2004; Herman and Oliver, 2023;
markets compared to non-exporters (WTO, 2021b). López-González, Sorescu and Kaynak, 2023). For
Thus, maintaining open trade is essential to address example, the gradual introduction of submarine internet
disruptions that could escalate due to geopolitical cables in Africa has been shown to yield substantial
tensions and climate change. positive effects on employment, particularly in higher-
skill occupations, with a portion of these employment
Outward-oriented policies aimed at attracting gains attributed to an increase in direct exports (Hjort
investment and participation in GVCs can help and Poulsen, 2019). Government spending on digital
technology absorption and diffusion. Open trade infrastructure also spurs private investment, with faster
and investment policies enable the global deployment internet connections correlating with greater benefits
of renewable equipment and essential technology, on digitalization (EIB, 2024). To bridge the digital skill
leading to infrastructure, technology and workforce divide, educational and training systems must integrate
skill improvements to meet international standards.
a balanced mix of core and technical skills into early
This, in turn, drives productivity enhancements and
education and sustain this development throughout
innovation within domestic industries. Equally crucial
lifelong learning endeavours (ILO, 2021a).
is fostering widespread technology adoption within
the domestic economy. Firms play a central role Strong institutions and regulatory capacities
in adopting advanced technologies and diffusing are important in harnessing the opportunities
them across the wider economy. Policies facilitating by the digital revolution. Open and robust

- 61 -
government regulations in digital markets can facilitate refining minerals into higher-value intermediate or
more effective utilization of digital technology for finished products, such as battery cells or electric
development purposes. Effective regulations can vehicle components, thereby fostering the creation
create an environment conducive to innovation and of skilled jobs. Exporting renewable energy requires
competition, fostering the growth of digitally enabled significant infrastructure upgrading in these economies,
industries and ensuring fair market practices. Research to establish the technological capabilities for capturing,
shows that a robust regulatory framework that ensures storing and transmitting energy over extended
trust in digital markets and fosters open access to distances. Scaling up climate action in emerging and
digital infrastructure, services and data amplifies the lower-income economies would require an additional
impact of digital connectivity, enabling economies 2 per cent of their GDP per year by 2025, and 4 per
to fully capitalize on the advantages of digital cent of GDP per year by 2030 (Songwe, Stern and
trade (Bellucci, Rubínová and Piermartini, 2023). Bhattacharya, 2022).20
A deepened commitment to supportive domestic
To harness trade opportunities, economies
business environments and to trade openness in
must establish regulatory capacity to meet
services form an important part of the comprehensive
certification requirements for sustainable
growth-enhancing policy agenda (World Bank and
exports. As many economies are implementing
WTO, 2023a).
sustainability regulations, meeting these standards
Government policies are needed to address becomes pivotal for future trade-led development. This
the challenges posed by the digital revolution. entails developing robust quality infrastructure systems
To tackle competition and job displacement in the comprising institutions and legal and regulatory
digital economy, government strategies may involve frameworks that are needed for ensuring compliance
encouraging larger firms in services to create lower- with environmental standards and certifications, as
skill jobs, facilitating access to productivity-enhancing well as facilitating the monitoring and enforcement of
investments for smaller enterprises, and investing sustainable practices throughout the production and
in technologies that complement low-skill workers supply chains. Advanced economies must ensure that
in service sectors (Rodrik and Stiglitz, 2024). While environmental standards and compliance mechanisms
prioritizing infrastructure and education, targeted are harmonized to avoid creating a spaghetti bowl of
government support can also spur digital industrial complex and contradictory regulations. Establishing
development. For instance, Manelici and Pantea (2021) mutually recognized standards and enhancing
noted that Romania’s income tax break for software regulatory capacity is crucial not only for enhancing
programmers in the early 2000s effectively stimulated market access for environmentally friendly products,
the information technology sector, contributing to but also for safeguarding against greenwashing and
economic growth. However, effective government maintaining credibility in global markets.
support policies must be carefully designed and Robust institutions and complementary
accompanied by strong institutions to prevent misuse policies are necessary to foster wide economic
of subsidies and distortions in the economy. Robust development in resource-abundant economies.
policies aimed at curbing industrial concentration and While the green transition offers export opportunities
promoting competition are important to effectively for resource-abundant developing economies,
address winner-take-all dynamics, especially within harnessing the benefits of extractive industries for
the digital industry. broader economic development can pose challenges.
Addressing the “Dutch Disease” requires investing
(iii) R
 obust institutions, complementary
in institutions to manage natural resource revenues
policies, and investment are key
and stimulating the manufacturing, agriculture and
determinants for sustainable growth in
services sectors for long-term growth. Strengthening
resource-rich developing economies
institutions can involve enhancing transparency,
Leveraging the green transition for trade-led accountability and anti-corruption measures in revenue
development necessitates significant investment. management, along with establishing robust legal
Mineral-rich economies can prioritize efficient extraction frameworks for resource extraction. In the past three
and processing of resources, investing in sustainable decades, many developing economies, particularly
mining practices to mitigate environmental impact commodity exporters, have adopted fiscal rules and
and ensure a stable supply of raw materials. These established sovereign wealth funds to build buffers
economies can further enhance value by directing during commodity price booms and to prepare for
investment into downstream manufacturing processes, price slumps (Marioli and Vegh, 2023).

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TRADE AND INCLUSIVENESS:
HOW TO MAKE TRADE WORK FOR ALL B TRADE AND INCOME CONVERGENCE

5. Conclusions to attract FDI and maximize the benefits that MNEs

can bring in terms of technology diffusion, economic
International trade has contributed significantly upgrading and access to global markets.
to the unprecedented global income convergence
Rising geopolitical tensions, digital revolution
of the past three decades. International trade creates
and climate change are shaping future
opportunities for developing economies to overcome their
opportunities for trade-led development.
relatively small economic size and achieve economies of
These three trends not only threaten future
scale, to enhance the competitiveness of their domestic
income convergence, but also past achievements:
markets, to gain access to technology through imported
geopolitical tensions can lead to increased obstacles
products and interactions with foreign firms, and to
to trade and investment and to fragmentation of
produce complex products, or their components, by the international trading system; new technologies
participating in multinational production networks. facilitating automation may undermine the prospects
Some economies have, however, experienced for traditional labour-intensive manufacturing-led
limited economic growth. Trade costs remain high growth in low-income economies; and climate change
in developing economies, especially in low-income disproportionately threatens livelihoods in these
economies and LDCs. Trade policy plays an important economies. On the other hand, new opportunities
role in the overall level of these trade costs, as low- for developing economies arise from efforts to
income economies and LDCs still apply relatively diversify global supply chains, from reductions in
restrictive trade policies, but also face higher trade trade costs through digitalization, which are creating
policy barriers in their export markets due to their new opportunities for services-led growth, and from
lower capacity to comply with foreign policies and efforts to de-carbonize the global economy, which
regulations. In addition to trade policy, other structural are creating new sources of comparative advantage
and institutional factors weigh on the foreign trade of in regions abundant in renewable energy sources,
some developing economies. Poor-quality and highly- and are increasing the demand for certain critical
priced infrastructure services, often exacerbated minerals, deposits of which can be found in developing
economies.
by services trade restrictions, result in high costs of
transportation and distribution, as well as in limited Reducing trade costs and ensuring that gains
access to electricity and telecommunications, which from trade are widely shared across the economy
can slow down the adoption of new technologies. will be key. Keeping trade open is crucial to seizing
new opportunities and minimizing risks. However,
Some economies, despite relatively high levels
obstacles to trade arise not only from restrictive
of trade participation, have not succeeded in
policies, but also from inadequate infrastructure,
diversifying into higher-productivity sectors or
geographical remoteness and institutional challenges.
activities, and their economic growth remains
Going forward, high trade costs in services, the
slow. Specialization in commodity extraction and
digital divide between more and less developed
production can create a number of challenges,
economies, and regulatory capacity and compliance
including exposure to high price volatility and negative
issues all need to be addressed to enable economies
effects on the competitiveness of other sectors. In the
to take full advantage of new opportunities. As will be
case of highly capital-intensive extractive activities,
discussed in chapter D, international cooperation is
these challenges also include low positive spillovers
essential to achieve an effective and predictable policy
to the broader economy, with potential implications for
environment in these areas.
increased inequality. This can negatively affect growth
prospects, as more unequal societies with a small
middle class lack a source of domestic demand that
can drive sustained growth.

Factors that slow structural transformation

and reduce technology diffusion also diminish
the potential of trade to accelerate economic
growth. Improving the functioning of domestic capital,
labour and land markets facilitates the economic
adjustment needed to realize the gains from trade. The
benefits of structural reforms are, in turn, enhanced
by outward-oriented development strategies that help

- 63 -
Endnotes
1 Economic growth has been found to lead to an almost one- 11 The multilateral review of trade concerns in the SPS and TBT
to-one rise in the real income of the poor (Dollar, Kleineberg committees at the WTO helps to shed light on potentially
and Kraay, 2016). Some recent studies estimate that a 1 problematic measures, and encourages WTO members to
per cent increase in GDP per worker is associated with avoid unnecessarily trade-restrictive measures that exceed
a 0.2-0.26 percentage point reduction in the US$ 1.90-a- benchmarks or do not follow best practice (WTO, 2012).
day headcount poverty ratio (Erumban and de Vries, 2021;
Benfica and Henderson, 2021). 12 The OECD producer support estimates consist of two
components: market price support and payments; only the
2 To measure trade participation, an adjusted trade share of payments component has been referred to here. Income
GDP was used. One drawback of the standard trade share groups are based on World Bank classification in 1995.
of GDP is that smaller economies appear to trade more The low- and middle-income group includes 16 emerging
than large economies. The trade participation index applied economies that were either low- or middle-income
in this instance is adjusted for this economy-size bias. economies in 1995 and remained middle-income economies
Specifically, the trade share of GDP for each economy and until 2021.
year is regressed on the economy’s geographical size. The
trade participation index is constructed by deducting the 13 Governments sometime apply tariffs as infant industry
part predicted by this variable from the trade share of GDP. policies. This involves government support for new and
Geographical size was chosen over population size because emerging industries to help them become competitive vis-
it has better predictive power. à-vis established foreign competitors. Economists are
divided on their efficacy. Proponents argue that these
3 For a consistent comparison over time, these figures policies are essential for fostering innovation, creating jobs,
are calculated based on a sample of country pairs for and diversifying the economy, as nascent industries often
which data are available throughout the entire period, lack the scale and experience to compete initially. Critics,
and the income groups composition is fixed in 1995. If however, contend that such protectionist measures can
all the country pairs available in 2021 are considered, lead to inefficiencies, dependency on government support
and the income classification in 2021 is used, and complacency, ultimately harming the economy. The
the share of trade among high-income economies remains at effectiveness of these policies largely depends on their
32 per cent, but the share of trade between high-income and design and implementation and on the broader economic
the rest increases to 52 per cent, while the share of trade context within which they are applied (Krugman, Obstfeld
among low- and middle-income decreases to 16 per cent. and Melitz, 2014).

4 The income groups are based on the 1995 World Bank 14 The analysis is based on the World Bank-WTO Services Trade
classification. The middle-income benchmark chosen is the Restrictions Index for 2020 (or the latest available) and covers
real GDP per capita of Egypt in 1995, the year it reached 134 economies, including 35 LDCs.
lower middle-income status.
15 Based on the indicator “Transport cost intensity, in US$
5 Fiji, Papua New Guinea, Solomon Islands, Tonga and Vanuatu per ton-km”. See https://unctadstat.unctad.org/datacentre/
did not converge while Samoa converged. dataviewer/US.TransportCosts.

6 According to the Global Peace Index, diverging economies 16 For example, there is no evidence of a positive effect of net
had 22 per cent lower political stability than the average in gold exports on growth in South Africa (Ziramba, 2011).
their income group. Meanwhile gold-dependent regions in Peru experienced
more stable exports and growth in the 21st century (Orihuela
7 In advanced economies, most productivity growth happened and Gamarra Echenique, 2019).
within sectors, while in emerging and developing (middle-
income) economies, between-sector reallocation accounted 17 The analysis is based on the product classification from
for two-fifths of productivity growth between 1995 and 2017 UNCTAD (2024b). Raw products include unprocessed,
(Dieppe, 2021). In developing Asia, productivity growth fresh, chilled and frozen products; minimally processed
accounted for one quarter of all productivity growth between products are cooked, steamed or dried, and include crude
1990 and 2018 (Erumban and de Vries, 2021). oils; processed products are fermented, smoked, sweetened,
salted or brined.
8 For a detailed summary of the empirical evidence, see
Blanga-Gubbay and Rubínová (2023). 18 Rodrik (2013) highlights that manufacturing’s relatively small
size in some poorer economies cannot provide a sufficient
9 See http://tradecosts.wto.org/ for more details and boost to economy-wide income from labour reallocation.
methodology. Increasing capital intensity of the sector only exacerbates
10 See http://ptadb.wto.org/ptaList.aspx for the list of preferential this issue.
trade arrangements.

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TRADE AND INCLUSIVENESS:
HOW TO MAKE TRADE WORK FOR ALL B TRADE AND INCOME CONVERGENCE

19 “Open safeguard” data policies refer to cross border data 20 For the specific investment and spending priorities identified
transfer mechanisms that tend to leave more discretion to above, emerging and developing economies other than
the private sector as to how to safeguard transfers (often China will need to spend around US$1 trillion in 2025
in the context of existing principles or guidance provided in (4.2 per cent of GDP compared with 2.2 per cent in 2019)
domestic regulation). These include ex-post accountability and around US$2.2 trillion in 2030 (6.9 per cent of GDP).
principles that that allow cross-border transfers to take place As such, total investment for development and climate
without specific upfront requirements such as additional legal goals will have to increase by US$3.5 trillion in 2030
steps, contracts or private sector-led adequacy decisions. (or 6.9 per cent of GDP) from the spending level in 2019
(Bhattacharya et al., 2022).

- 65 -
C
Trade and inclusiveness
within economies
Trade has raised aggregate welfare and reduced
poverty without necessarily raising inequality in many
economies, but the impact of trade is more complex
for individuals. People may benefit from cheaper
prices, larger variety and export opportunities, but
they may also face increased competition and may,
therefore, either gain or lose from trade. This chapter
reviews why, although most people gain from trade,
some suffer losses. These losses can be aggravated
by distortions and barriers, such as mobility costs
or monopolies, that tend to impact more vulnerable
groups disproportionately, and may prevent them from
adjusting to import competition and accessing export
opportunities. The chapter also examines why using
restrictive trade policy to redistribute gains from
trade is often unsuccessful and can have unintended
consequences, such as retaliation by trade partners.
In contrast, domestic policies, such as education and
social protection, are more effective in addressing
inequality. Their importance is likely to grow as the
digital revolution, climate change and geopolitics
continue to shape the distributional impacts of trade.

Contents
1. T
 rade raises overall incomes and reduces poverty without
necessarily increasing inequality 68

2. Most people gain from trade but some suffer losses 71

3. F
 airer trade policies and domestic complementary policies are crucial
to make trade more inclusive 86

4. Inclusive trade is set to undergo transformation amid emerging global trends 91

5. Conclusions 94

- 66 -
Key points

• Over the past 30 years, trade has generated substantial welfare

gains and poverty reduction in many economies without necessarily
raising inequality.

• Gains from trade are unevenly distributed among individuals within

the economy. While trade generally brings benefits to many through
more affordable goods and services and new job opportunities,
some people may experience challenges due to import competition.

• Individuals with lower incomes, workers with fewer skills, small

business-owners and some women may face challenges in adjusting
to the new economic conditions associated with trade openness.
In the absence of adequate policy responses, the effects of labour
market disruptions can last for long periods.

• Using trade-restrictive policies to address distributional outcomes

can have unintended consequences, such as increasing the prices
of goods mainly consumed by poorer households. Domestic
policies, such as lowering the cost of education or investing in rural
infrastructure, are significantly more effective in addressing inequality.

• The digital revolution, climate change and geopolitical tensions

increasingly affect how inclusive trade is and how it interacts
with inequality. Domestic policies are essential to overcome new
challenges to inclusive trade, such as the digital divide between
rural and urban areas, differing opportunities for skilled and unskilled
workers, or the unequal exposure of different groups to the cost of
climate shocks.

- 67 -
1. Trade raises overall incomes Growing incomes and falling poverty have been
achieved in many economies without increasing
and reduces poverty without inequality. On average, income inequality has slightly
necessarily increasing inequality declined over the past 30 years, but it remains high in
absolute terms, and some large economies face rising
The expansion of trade over the past 30 years, inequality. According to data from the World Inequality
since the creation of WTO, has helped to Database,1 the average Gini index, a measure of
decrease poverty substantially. As highlighted in inequality, across a large set of economies fell from
Chapter B, trade raises incomes and these income about 0.58 prior to the global financial crisis to 0.57 in
gains have led to significant benefits for some of the 2022 (see Figure C.2(a)). 2 However, the global average
most vulnerable groups within economies. The number hides that some of the largest economies in the world,
of people living in extreme poverty has fallen by over including China, Japan and the United States, saw
one billion since 1990 and trade has contributed steep increases in inequality in the 1990s and 2000s.
substantially to this (World Bank and WTO, 2015). Moreover, in absolute levels income inequality is high
The poverty headcount ratio of low- and middle- when compared to data over the past 100 years. The
income economies fell from 40.3 per cent in 1995 average share of income received by the top 1 per cent
to 10.6 per cent in 2022, while the share in global across all economies stands at 15.8 per cent. For
exports of these economies doubled from about 16 some of the economies for which long data series
per cent to 32 per cent (see Figure C.1). Most of are available, current inequality levels correspond
this increase occurred in emerging to those last seen in the early 20 th century. This is
economies, which managed to increase their because of a steady increase in income inequality
share of global exports from 16 per cent to between the early 1980s and the mid-2000s that
35 per cent. Highly successful examples reversed a global fall in inequality present for most
include China, which has tripled its share of of the 20 th century (Piketty, 2003; Piketty and Saez,
world trade since joining the WTO, all the 2003; Atkinson, Piketty and Saez, 2011) (see Box C.1).
while cutting its extreme poverty rate from 36 Like income inequality, wealth inequality has remained
per cent to less than 1 per cent, and Viet Nam, stable but high in the last three decades, with the
which has reduced its rate of extreme poverty average share of personal wealth held by the top
from 60 per cent to less than 3 per cent since the 1 per cent falling from 31.4 per cent in 1995 to
1990s through a combination of domestic 30.6 per cent in 2022.
reforms and reductions in trade barriers.

Figure C.1: Substantial poverty reduction alongside increased trade participation of low-
and middle-income economies, 1995-2022
40%

35%

30%

25%

20%

15%

10%

5%
09
95

96

97

98

99

00

01

02

03

04

05

06

08

10

11

12

13

14

15

16

17

18

19

20

21
07

22
20
19

20
19

19

19

19

20

20

20

20

20

20

20

20

20

20

20

20

20

20

20

20

20

20

20

20

20

Poverty headcount ratio at US$ 2.15 a day (2017 PPP) (% of population) Exports of goods and services (% of global exports)

Source: Authors’ calculations, based on World Bank data on poverty, exports and GDP.
Note: The figure displays the evolution of the average share of poverty headcount at US$ 2.15 a day (2017 PPP) in population and the share of
exports of goods and services in global exports for low- and middle-income economies over the period 1995-2022. The income groups are
based on the 2022 World Bank’s classification.

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TRADE AND INCLUSIVENESS:
HOW TO MAKE TRADE WORK FOR ALL C TRADE AND INCLUSIVENESS
WITHIN ECONOMIES

Trade may increase or decrease inequality within consumers from tariff removal can, in some cases, more
an economy, but its overall impact on inequality than offset wage losses, thereby reducing inequality
tends to be small. The slight fall in inequality over the past (Ural Marchand, 2019). More recent disaggregated
30 years coincided with a substantial increase in trade. analysis for the United States suggests that the impact
In fact, trade openness and inequality are only weakly, of trade differs more between households with similar
and negatively, correlated (see Figure C.2(b)). This is in income levels but differing characteristics, such as
line with quantitative studies which suggest that trade employment sector or location, than between high- and
does not necessarily increase inequality. For instance, low-income households. As a result, the shape of the
tariff liberalization in developing economies could income distribution – a measure of income inequality
decrease inequality in some economies but increase – remains essentially unchanged in response to more
it in others, with this increased inequality dwarfed by trade, although trade can have very disparate effects
large average welfare gains (Artuç, Porto and Rijkers, on similar workers and, thus, create winners and losers
2019). Similarly, the larger benefits on low-income (Borusyak and Jaravel, 2024). 3

Figure C.2: Limited reduction in income inequality amidst greater trade openness

(a) Gini coefficient, 1995-2022

0.62

0.60

0.58

0.56
Gini index

0.54

0.52

0.50

0.48
95

96

97

98

99

00

01

02

03

04

05

06

08

09

10

11

12

13

14

15

16

17

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20

21
07

22
20

20
19

19

19

19

19

20

20

20

20

20

20

20

20

20

20

20

20

20

20

20

20

20

20

20

20

20
Low-income economies Middle-income economies High-income economies Global average

(b) Gini coefficient and trade openness, 2021

0.8

0.7

0.6
Gini index

0.5

0.4

0.3
0.5 2.0 3.5 5.0 6.5 8.0 9.5
Trade openness index

Low-income economies Middle-income economies High-income economies

Source: Authors’ calculations, based on World Inequality Database and World Bank data on trade openness.
Note: Panel (a) shows the evolution of the average Gini index by income group over the period 1995-2022. Panel (b) shows the correlation
between the Gini index and trade openness index. The Gini index is a measure of inequality, ranging from 0 for perfect equality to 1 for maximal
inequality. The trade openness index corresponds to the share of exports and imports over GDP conditional on economy size. The analysis in
panel (a) covers 167 economies, classified based on the World Bank’s income group classification, with each economy assigned to the income
group it spends the majority of years in. If an economy spends an equal number of years in two groups, the lower income group is chosen. The
analysis in panel (b) covers 157 economies, classified based on the 2021 World Bank’s income group classification.

- 69 -
Box C.1: Global inequality has fallen recently

Global inequality refers to the distribution of income among individuals worldwide, encompassing both
within-country and between-country income differences. Hence, it covers both the concept of convergence
(i.e., poorer economies catching up with richer ones in terms of income) discussed in Chapter B and
the concept of inclusiveness that will be discussed in this chapter. A global perspective of inequality
complements insights from the within-economy and between-economy analysis and allows specific regional
income groups to be compared to the same global income group (Milanovic, 2016, 2006).

Global inequality has declined substantially over the past 30 years but remains high. It surged between
1960 and 1980 but since then has fallen back to levels seen prior to this surge (see Figure C.3(a)). This fall
coincided with a rapid expansion of international trade that favoured the income convergence between
developing and developed economies discussed in Chapter B. As a result, the between-country component
of global inequality decreased from 57 per cent in 1980 to 32 per cent in 2020 (see Figure C.3(b)).

Figure C.3: High global inequality despite a significant decline

(a) Global inequality, 1920-2020 (b) Global inequality decomposition, 1820-2020

55% 100%
90%
Ratio top 10% / bottom 50%

80%
50%
70%
Inequality share

60%
45% 50%
40%
30%
40%
20%
10%
35% 0%
20

30

50

50

00

20
40

70

50

80

00

20
60

90

10

20

20
80

00
19

19

19

18

19

19
19

19

19

19

20

20
19

19

20

20

18
19

20

Between-economy inequality Within-economy inequality

Source: Authors’ calculations, based on Chancel et al. (2021) and Chancel and Piketty (2021).
Note: Panel (a) shows the evolution of the ratio between the incomes of the top 10% and the bottom 50% in global income over the period
1920-2020. Panel (b) shows the evolution of the global inequality decomposition into within-country and between-country components
over the period 1820-2020.

Another way to depict global inequality is to look at income growth rates along the global income distribution.
The evolution of global inequality between 1988 and 2008 followed a pattern commonly known as the
“Elephant Curve” (Lakner and Milanovic, 2013). The global middle-income group, composed mostly of
populations in Asia, and the top global 5 per cent experienced the largest real income growth over the
period, while populations around the 80 th and 90 th percentiles, mainly comprising the middle or lower-middle
classes from advanced economies, saw little to no real income growth (Lakner and Milanovic, 2013) (see
Figure C.4). A more disaggregated analysis suggests that the shape of the “Elephant Curve” can, in part,
be attributed to the collapse of incomes in former Soviet states following the breakup of the Soviet Union
(Corlett, 2016).
More recent analysis points to a decrease in global inequality between 2008 and 2018, with slower growth
for the top global 1 per cent, limited improvement for the 80th and 90th percentiles of the population, but
significant growth for the poorest percentiles (Milanovic, 2024). However, in contrast to wealth inequality
within economies, global wealth inequality has increased: 38 per cent of total wealth growth between 1995
and 2021 went to the top global 1 per cent (Chancel et al., 2021).

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TRADE AND INCLUSIVENESS:
HOW TO MAKE TRADE WORK FOR ALL C TRADE AND INCLUSIVENESS
WITHIN ECONOMIES

Box C.1: Global inequality has fallen recently (continued)

Figure C.4: Lower global income inequality amidst higher global wealth inequality, 1988-2021

9%

8%

7%
Average real annual growth rate

6%

5%

4%

3%

2%

1%

0%
5 10 15 20 25 30 35 40 45 50 55 60 65 70 75 80 85 90 95 100
Percentile of global distribution

Income (1988-2008) Income (2008-2018) Wealth (1995-2021)

Source: Authors’ calculations, based on the World Bank Povcal Database and Luxembourg Income Survey and on the World Inequality
Database.
Note: The figure displays growth incidence curves which measure how much income and net wealth have grown along the global
population distribution. Net household wealth is the total amount of financial assets.

2. M
 ost people gain from trade (a) T
 he distribution of the gains from trade
among workers is unequal
but some suffer losses
Trade tends to raise incomes and growth, but
Most individuals gain from trade, but some many gains from trade depend on redistribution
suffer losses, especially if they are exposed within economies, from relatively less to more
to distortions and barriers that limit their productive firms, sectors or regions. In fact, from
adjustment or access to foreign markets. When comparative advantage to scale and selection effects,
aggregate gains from trade are not distributed equally, the most influential sources behind the gains from
some see income gains, while others encounter losses. trade all imply unequal outcomes within economies.
The rewards of trade flow mainly to workers in the As a result, trade benefits some more than others, and
most productive firms, sectors or regions. However, can even cause absolute income losses for workers
trade affects individuals not only as workers, but also who lose their jobs for trade-related reasons, and
as consumers, and the consumption benefits of trade in the regions where such job losses occur. These
flow disproportionately to households with relatively distributional impacts of trade do not necessarily
less income. Moreover, by shifting resources to increase inequality, however, as they can benefit
their most productive uses, trade can create job workers and regions that had relatively lower incomes.
opportunities, and these can benefit those initially Further, the evidence presented in this subsection
affected negatively by resource shifts. However, this suggests that the majority of workers benefits. This
requires the ability to adjust, for instance through is in line with descriptive evidence showing that
occupational, sectoral or geographical mobility. trade accounts for a growing share of employment.
Factors that prevent such adjustment, referred to as For example, the average share of jobs dependent
distortions and barriers, and including issues like on exports across 61 economies with available data
excessive market power or discriminatory norms, can increased by over 20 per cent between 1995 and
limit access to trade and may disproportionately affect 2019, with the average share of jobs dependent on
certain populations, such as unskilled workers, rural exports reaching 28 per cent in 2019 (see Figure C.5).
populations or some women.

- 71 -
 Figure C.5: Increasing share of employment embodied in exports, 1995-2019
29%

28%
Share of employment embodied in gross exports

27%

26%

25%

24%

23%

09

11
97

99

01

03

05

13
10

12

14

15

16

17

18
95

96

98

00

02

04

06

08
07

19
20

20
19

19

20

20

20

20

20

20

20

20

20

20

20

20

20
19

19

19

20

20

20

20

20
Source: Authors’ calculations, based on the OECD Trade in Employment database.
Note: The figure shows the evolution of the average share of employment embodied in gross exports as a percentage of total employment
between 1995 and 2019. It includes both employment in exporting industries and, employment in other (upstream) domestic industries embodied
in intermediate inputs used by exporting industries. The analysis covers 19 middle-income economies and 42 high-income economies. Due to
the effects of the COVID-19 pandemic, the 2020 observation was omitted.

(i) C
 omparative advantage and offshoring lead relative employment losses, while areas dependent on
to differential impacts of trade on workers comparative advantage sectors, such as automobiles,
expanded after an increase in trade with China
Specialization according to comparative
and Central Eastern Europe (Dauth, Findeisen and
advantage leads to gains from trade that are
Suedekum, 2014). In Brazil, regions specialized in
distributed unequally among workers or regions.
Comparative advantage arises due to differences in agriculture or mining gained from trade-opening, while
productivity across occupations or sectors which, regions with a higher manufacturing share incurred
in turn, can be driven by countless factors, from relative losses (Costa, Garred and Pessoa, 2016; Dix-
the availability of skilled workers to the quality of Carneiro and Kovak, 2017). In South Africa, regions
institutions. Trade allows economies to benefit from with employment in sectors that faced large tariff cuts
these differences by enabling them to specialize experienced manufacturing employment losses relative
in the production of goods they are relatively good to regions with sectors not subject to tariff cuts (Erten,
at producing, while importing goods that foreign Leight and Tregenna, 2019). In contrast, in China,
economies are better at producing than they are. As regions that experienced the largest reductions in
a result, substantial wage gains occur in expanding trade policy uncertainty following WTO accession saw
sectors, while workers in contracting sectors increases in manufacturing employment and declining
experience a higher risk of job loss. This phenomenon agricultural employment compared to other regions
often spills over to affect regional disparities, as (Erten and Leight, 2021).
sectors typically cluster regionally.
The impact of trade openness on workers also
The impact of trade openness on workers varies depending on their occupation and skillset.
varies depending on the industry and region The impact of trade openness on wages may be more
in which they are employed. For instance, while pronounced through occupational exposure than
overall welfare improved, US regions more specialized through sectoral exposure (Basco et al., 2024; Ebenstein
in manufacturing experienced a relative decline in et al., 2014). For instance, increased import competition
income following a surge in trade with China, whereas from China resulted in income losses primarily affecting
regions more specialized in agriculture and services low-wage workers in US import-competing sectors
experienced relative income gains (Caliendo and (Autor et al., 2014). It also led to reduced trade gains for
Parro, 2023). Similarly, in Germany, areas hosting medium-skilled workers with sector- and firm-specific
import-competing sectors, such as textiles, faced skills in Germany (Dauth, Findeisen and Suedekum,

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TRADE AND INCLUSIVENESS:
HOW TO MAKE TRADE WORK FOR ALL C TRADE AND INCLUSIVENESS
WITHIN ECONOMIES

2014). In Indonesia, tariff cuts enabled firms to import The substantial impact of trade on regional
more affordable and higher quality inputs, enhancing inequality is, to a relevant degree, the result
their competitiveness and increasing hires of low- of intra-regional spillovers. Much of the literature
skilled workers, effectively reducing inequality and finds that trade shocks trickle down local economies
poverty (Amiti and Davis, 2012; Kis-Katos and Sparrow, through indirect, general equilibrium, effects. For
2015). Similarly, the implementation of the US-Viet Nam instance, negative wage effects are not limited to
cooperation trade agreement opened up new export import-competing sectors, but can be observed more
opportunities in apparel and textiles for many Vietnamese broadly in hard-hit regions, most likely because job
firms, particularly benefitting younger workers with losses and wage cuts lower local demand (Autor, Dorn
lower education levels, thereby reducing inequality. In and Hanson, 2013; Hakobyan and McLaren, 2016;
general, trade and labour interact in a dynamic setting, Dix-Carneiro and Kovak, 2017). Conversely, regional
constantly evolving in response to various economic and proximity to industries that are indirectly exposed to
social factors. The labour effects of trade on individuals rising exports can contribute to a significant share
or regions can change over time when new industries of local employment expansion, driven by worker
gain comparative advantages (see Box C.2). transitions between directly and indirectly exposed
industries and knowledge spillovers (Helm, 2020).

Box C.2: Winners from trade may change over time

Those who gain and those who lose out as a result of trade openness tend to change over time. Evidence
suggests that one important source of gains from trade, comparative advantage, is highly dynamic. A study
of 90 economies found that there is continuous turnover in an economy’s export basket. In fact, 60 per
cent of the goods that accounted for the top 5 per cent of those economies’ current absolute advantage
industries were not in the top 5 per cent two decades earlier (Hanson, Lind and Muendler, 2015).

A change in industry capabilities often translates to changes in regional capabilities. An example of this can
be seen in Figure C.6, which shows how the spatial distribution of exports in the United States developed
across two sets of states from 1960 until recently, with the Southern states gaining export shares at the
expense of the so-called “Rust Belt” states.

The dynamics underlying comparative advantage and international trade suggest that complementary
policies should be flexible, and not necessarily restricted to particular sectors or regions. Furthermore,
impact assessments may be challenging because the exact causes of these dynamics are often unclear.

Figure C.6: US export shares by US state aggregates, 1960-2021

50%

45%

40%
Share of US exports

35%

30%

25%

20%
1960 1970 1980 1990 2000 2010 2020

"Rust Belt" states Southern states

Source: Authors’ calculations based on the US Census Bureau’s Exports from Manufacturing Establishments reports.
Note: Data are from 1960, 1971, 1983, 1991, 2001, 2011 and 2021, starting with the earliest year with data availability for US state-level
exports, then every 10 years subject to subsequent data availability. The “Rust Belt” states refer to Illinois, Indiana, Michigan, Missouri,
New York, Ohio, Pennsylvania, West Virginia and Wisconsin. Southern states refer to Alabama, Arkansas, Delaware, Florida, Georgia,
Kentucky, Louisiana, Maryland, Mississippi, North Carolina, Oklahoma, South Carolina, Tennessee, Texas, Virginia and West Virginia.

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Offshoring has been linked to increased wage small firms, which impacts individual inequality, given
inequality. The rise of global value chains (GVCs) the different employment profiles of these firms.
and the associated offshoring can magnify the Agglomeration benefits some regions at the expense
distributional effects of trade as it amplifies the role of others affecting spatial inequality. This is similar to
of comparative advantage. The spatial unbundling of the comparative advantage channel, but has clearer
production stages allows for comparative advantage predictions for the rural-urban divide.
to operate at the more disaggregated level of tasks,
Large productive firms dominate exports and
such as research or assembly, rather than goods.
imports. Empirical evidence, supported by economic
This implies an even stronger shift in labour demand
theory, confirm the important role of large productive
towards the abundant factors of an economy with
firms in both exports and imports. For instance, in
magnified distributional impacts (Baldwin, 2016).
the United States, only about 18 per cent of firms
While, in theory, the productivity-enhancing effects
exported and only 9 per cent imported in 2021.
of offshoring can offset the inequality increase
Of those, large firms, i.e. firms having more than
(Grossman and Rossi-Hansberg, 2008), empirical
500 employees, accounted for more than two-thirds of
evidence tends to show that offshoring does increase
export and import values (U.S. Census Bureau, 2023).
wage inequality, especially between routine and non-
In the European Union, importers with more than
routine workers (Hummels, Munch and Xiang, 2018).
250 employees made up only 2.8 per cent of the
This phenomenon also applies to the offshoring of
number of importing enterprises but accounted for
services inputs (Crinò, 2010; Ariu et al., 2019).
56.1 per cent of extra-EU imports in 2021. Large
Offshoring can also explain why trade is exporters made up 3.6 per cent of the number of
associated with an increase in the skills premium exporting enterprises while accounting for 64.8 per
in some developing economies. Evidence from a set cent of the value of exports (Eurostat, 2023). Similarly,
of mostly Latin American developing economies finds in a sample of 32 low- and middle-income economies,
that trade-opening increased the skills premium, defined the largest exporter alone accounts on average for
as the ratio between the wages of skilled and unskilled about 14 per cent of a country’s non-oil exports
workers. This was argued to be in contradiction to (Freund and Pierola, 2015).
traditional trade theory, which suggests that trade
Large firms tend also to respond better to import
should raise incomes of the factor that is abundant in an
competition. For instance, a study on Mexican firms
economy. For developing economies, this was assumed
facing import competition from China found that
to be low-skilled labour (Goldberg and Pavcnik, 2007).
smaller firms saw reduced sales and were more likely
Offshoring could offer a possible explanation for this. As
to shut down, while larger plants were relatively less
the same offshored tasks, such as assembly of mobile
affected by import competition. Moreover, large firms
phones or back-office roles, may be considered not
benefitted substantially more from access to cheaper
skill-intensive in developed economies but skill-intensive
Chinese inputs, resulting in increased sales and
from the perspective of developing economies, skill
product survival. These factors caused market shares
premiums may increase everywhere due to offshoring
to shift to larger firms, benefitting the overall economy
(Feenstra and Hanson, 1996). However, much of this
but negatively impacting workers in smaller firms
evidence on the increased skill premium in developing
(Iacovone, Rauch and Winters, 2013).
economies comes from middle-income economies,
such as Colombia or Mexico. In contrast, studies on The concentration of trade within a few firms
low-income economies, such as Viet Nam or Indonesia, affects inequality because these firms tend to pay
observe decreasing wage inequality due to trade and higher wages and hire more skilled employees.
offshoring, in line with traditional trade theory. The average wages paid by exporting firms in developing
economies range from 6 per cent to 35 per cent higher
(ii) S
 election, scale and agglomeration can
than wages paid by non-exporting firms (Bernard et al.,
increase wage inequality
2007; Fariñas and Martín-Marcos, 2007; Baumgarten,
Gains from trade arise not only from differences 2013). Similarly, the average wage paid by exporting
across sectors, but also because trade allows firms in low- and middle-income economies were
productive firms to expand and benefit from estimated to be 31 per cent higher than other firms in
agglomeration externalities. These factors can give the same industry (Brambilla, Depetris Chauvin and
rise to intra-industry trade which has, nevertheless, Porto, 2017). Some of this effect is driven by the fact
implications for inequality. Economies of scale and that exporters typically also import, and that importing is
the self-selection of the most productive firms into equally associated with a large wage premium (Martins
exporting increase differences between large and and Opromolla, 2011). A relevant part of the wage

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WITHIN ECONOMIES

premium arises because trading firms tend to employ between industries. The variation within industries is
more skilled employees and match employee skills driven by more productive firms which are more likely
better to tasks. As a result, trade raises wage inequality to pay higher wages and to locate in large cities. As
by increasing the skill premium (Helpman et al., 2016; a result, trade widens urban-rural wage inequality.
Bombardini, Orefice and Tito, 2019). However, higher wage inequality does not necessarily
translate into higher welfare inequality, when prices in
Differences between import-competing and
larger cities are higher than in rural areas (Bakker et
trading firms can raise not only the skill
al., 2024).
premium but also inequality between workers
with similar skill levels. Trade cost reductions (iii) T
 rade affects not only employment and
in emerging economies have been found to boost wages but also job quality
wages at exporting firms for both low- and high-skilled
Trade can help to improve working conditions.
workers, but to decrease wages at import-competing
Despite occasional news reports of abusive working
firms. In addition, tariff cuts on inputs led to increased
conditions in specific exporting firms, empirical
wages at importing firms relative to firms that only
evidence suggests that, on average, foreign-owned and
source domestically (Verhoogen, 2008; Amiti and
exporting firms tend to have better working conditions
Davis, 2012; Helpman et al., 2016). Variations in the
than domestic firms in developing economies. In
quality of products produced by firms may also lead
addition to higher wages, MNEs and exporters provide
to trade affecting similar workers differently. Recent
more formal job opportunities and can improve various
evidence finds that French firms, and hence their
working conditions, such as occupational safety and
workers, producing more expensive footwear were
health provisions (Park, Lundquist and Stolzenburg,
less affected by import competition from low-cost
2023). These effects can be magnified through
economies than firms charging low prices (Piveteau
supply chains as some MNEs, motivated by consumer
and Smagghue, 2024). Offshoring can lead to
demand for sustainable products and pressure by
inequality between similar workers as it allows some
non-governmental organizations, put pressure on their
low-skilled workers in developing economies to access
suppliers to enforce labour standards. This is often
advanced technologies by working for subsidiaries of
achieved through relational sourcing contracts, which
multinational enterprises (MNEs), which pay significant
provide financial incentives to compliant suppliers,
wage premia (Antràs, Garicano and Rossi-Hansberg,
and contract termination clauses in case of non-
2006; Baldwin and Robert-Nicoud, 2014).
compliance (see Chapter D.3 and Box D.3).
Gender inequality can worsen disparities
Trade can contribute to reduce child labour by
between workers with similar skill levels. Recent
fostering economic conditions where families
studies find that trading firms that require interactions
are less dependent on children’s earnings. The
across different time zones and long-distance travel
prevalence of child labour not only deprives children
reward employees perceived to be more flexible with
of their childhood and education but also perpetuates
regard to these requirements. This typically benefits
a cycle of poverty, hindering long-term economic
men’s career progression and wages. Studies on
development. Trade can significantly reduce child
Norway and South Africa suggest that the gender
labour by increasing incomes and lowering prices.
wage gap in exporting firms is about 2-3 percentage
This enables families to provide for their children’s
points larger than in non-trading firms once worker
necessities and education without depending on child
characteristics are controlled for. In the case of
labour for additional income. Additionally, as economies
Norway, this difference arises only among highly
grow and diversify through trade, employment
skilled men and women, as the flexibility requirements
opportunities for adults can improve, further reducing
are particularly pronounced among managers (Bøler,
the economic necessity for child labour (Edmonds and
Javorcik and Ulltveit-Moe, 2018; Janse van Rensburg
Pavcnik, 2004; Ugarte, Olarreaga and Saiovici, 2023).
et al., 2020).
(iv) The overall impact of trade on individual
Spatial inequality can also rise when exporting
workers is complex
plants are located in only a few areas within
an economy. Exporting activity tends to be heavily The net impact of trade on individual workers
concentrated in larger cities (Garcia Marin et al., 2020). is a combination of the impacts of import
A study on four middle- and high-income economies competition, access to foreign inputs and export
found that this spatial concentration is due primarily opportunities. These three channels all play out at
to variation within industries, rather than differences different levels, including occupation, firm, sector and

- 75 -
region. This generates a large number of potential available to consumers. Many economic models of
impacts that trade may have on workers with the net international trade emphasize gains from consumption
impact depending on which channels dominate. For rather than gains from labour market effects. This
instance, an individual worker might reside in an import- makes sense in that the consumption effects of trade
competing region but work for a large firm that sources affect a much larger share of the population than the
a large share of inputs from abroad, with the result that labour market effects. Despite this, trade policy in
the latter two channels might offset the first one. some economies is centred around the effects of trade
on workers, on the basis that individuals are not just
The main implication of these multilayered
consumers, but also workers. However, such a focus
effects of trade on workers is that they will be
ignores the fact that a substantial share of individuals
heterogeneous across economies and even
do not work, for instance because they have retired or
across similar individuals. As a result, the labour
are too young. Moreover, a large share of workers in
market effects of trade do not consistently increase or
economies at all income levels, but particularly in high-
decrease inequality at a more aggregated level. Studies
income economies with large public services sectors,
on some economies find that trade has a significantly
do not face import competition. In fact, based on data
larger negative impact on low-income individuals
by the Organisation for Economic Co-operation and
through the labour market (Ural Marchand, 2019; Adão
Development (OECD), the average population share
et al., 2022), while others observe a significantly larger
affected by import competition was only 1.85 per cent
positive effect on low-income individuals in other
in 2019 for the 14 most populous economies covered in
economies (Dix-Carneiro and Kovak, 2017). This is
the database (see Figure C.7), and has hardly changed
in line with recent work suggesting that the degree of
relative to 1995. In smaller economies, this figure was
occupational, sectoral and geographical exposure to
slightly larger: the average across all 58 economies in
trade is likely more important to worker outcomes than
the database was – a still limited – 5.89 per cent. As a
personal factors such as education and, by extension,
result, the positive consumption effects of trade, even
income (Artuç, Chaudhuri and McLaren, 2010;
for most workers, are likely to directly impact a larger
Traiberman, 2019; Kim and Vogel, 2021; Costinot,
number of people than the labour market effects.
Sarvimäki and Vogel, 2024).
Trade’s large welfare gains through consumption
However, initial exposure to trade is not the only
have substantial redistributive effects and can
factor determining the long-term effects of trade,
counter inequality-increasing effects on the
as the ability to adjust is also important. Workers
labour market. Only recently, research examined to
in firms confronted with heightened import competition
what extent the consumption effects of trade impact
may need to acquire new skills to remain competitive in
individuals, and therefore inequality, differently. This
the job market, explore opportunities in other growing
research highlights two channels in particular, that both
sectors, or consider relocating to regions with more
imply larger welfare gains for low-income households:
favourable job prospects (see Box C.3). Evidence from
non-homothetic preferences (i.e., income- or wealth-
a grain import surge in Prussia around 1900 shows
dependent consumption patterns) and heterogeneous
that persistent negative income effects on affected
price elasticities. The first of these channels operates
workers were avoided due to a strong labour mobility
through lower-income households spending a larger
response towards other sectors and regions (Bräuer
share of their income on imported products, thereby
and Kersting, 2024). Recent findings indicate that job
benefitting more from trade. The second channel
transitions resulting from access to cheaper foreign
operates through lower-income households being
inputs can significantly contribute to individuals’ wage
more sensitive to price changes and, therefore,
growth. Conversely, involuntary job loss due to import
benefitting more from trade-induced price reductions.
competition can result in unemployment and compel
workers to accept lower wages at new jobs (Arni et Consumers in low-income households tend to
al., 2024). This emphasizes that the extent to which benefit more from trade openness. Due to their
workers can adjust to trade shocks is critical, and this relative higher spending on imported products, poor
ability typically relates to factors such as education, households are estimated to experience approximately
income or gender. twice the consumption-related gains from trade
compared to rich households, which tend to consume
(b) T
 rade benefits consumers, with a greater
more non-traded services (Fajgelbaum and Khandelwal,
impact on lower-income households
2016). An increase in trade costs may therefore have a
Trade leads to substantial welfare gains by greater impact on the purchasing power of low-income
making a cheaper, more diverse set of products consumers. For instance, the United Kingdom’s exit

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TRADE AND INCLUSIVENESS:
HOW TO MAKE TRADE WORK FOR ALL C TRADE AND INCLUSIVENESS
WITHIN ECONOMIES

Box C.3: Putting studies on import competition shocks in context

The limited impact of trade on inequality, as discussed in this chapter, is not in contradiction with evidence
on relative regional and individual losses from international trade. The literature illustrates that import
competition shocks can lead to negative income effects for those affected relative to unaffected workers or
regions. From impacts on poverty to informal employment to manufacturing employment, the literature shows
that increased import competition can causes substantial local labour market disruptions (Topalova, 2007;
Autor, Dorn and Hanson, 2013; Dix-Carneiro and Kovak, 2017).

However, by focusing on import competition, often from a single trade partner, such studies fail to account for
the multitude of channels through which trade affects individuals and regions, including export opportunities,
access to cheaper inputs and lower consumption prices. For example, there is evidence for a large sample
of economies that improvements in market access increase sector-level wages (Olarreaga, Piermartini and
Porto, 2020). By the same token, McCaig (2011) finds that provinces in Viet Nam that benefited from larger
tariff cuts in US markets following the implementation of the US-Viet Nam cooperation trade agreement
experienced greater declines in poverty rates. Since these channels often operate in opposite directions,
inequality impacts might appear starker. For example, when the United States was faced with increased
import competition from China, even upper-bound academic estimates are small relative to the overall
turnover in the labour market of an economy the size of the United States. For instance, a crude comparison
of the 2.4 million layoffs resulting from Chinese import competition from 1999 to 2011, estimated by
Acemoglu et al. (2016), and the roughly 2 million monthly layoffs in the US non-farm sector over the same
period, reported by the US Bureau of Labor Statistics, would amount to a contribution of trade to less than 1
per cent of total layoffs over that period.

Other studies that assess the broader effects of Chinese import competition, including the expansion in
construction and services employment due to imported cost-effective inputs, report relatively minor negative
or even positive effects of greater import competition on net job creation. Even when specifically examining
manufacturing employment, these studies find relatively small absolute effects due to offsetting factors
(Feenstra and Sasahara, 2018; Caliendo, Dvorkin and Parro, 2019).

The relatively small estimates of labour impacts from import competition are in line with theoretical and
empirical evidence on the role of trade for employment (Bacchetta and Stolzenburg, 2019). If labour market
distortions, such as imbalances between skills offered and required in the labour market, are sector-specific,
trade can affect aggregate unemployment by reallocating resources across sectors. However, these effects
are relatively less significant compared to the underlying distortions driving unemployment. Accordingly,
empirical studies find small positive effects of trade-opening on employment. For instance, a 10-percentage
point increase in total trade openness was found to reduce aggregate unemployment in high-income
economies by about three-quarters of one percentage point (Felbermayr, Prat and Schmerer, 2011).
Hence, the import competition literature is complementary to the more comprehensive studies cited
in this chapter. Moreover, even small aggregate effects can be highly disruptive if they are concentrated
among few sectors or regions and last for extended periods. Several economy-specific factors, such as
informality or market power, mediate the impacts of trade and make it harder for some individuals to adapt
to import competition or access new export opportunities. Not accounting for these factors might lead to an
underestimation of the distributional implications of trade.

from the EU single market and customs union resulted welfare gains 57 per cent larger than the US highest-
in a 6 per cent increase in food prices, which increased income households after China’s accession to the WTO
the cost of living of the poorest households by 52 in 2001 (Carroll and Hur, 2020).
per cent higher compared to the richest households The impact of trade on consumers is in part
(Bakker et al., 2022). Across the wealth distribution, determined by the type of products traded and
differences in consumption can be even starker. For the trading partners involved. More detailed data
instance, US lowest-income households experienced provides more complex findings on how progressive

- 77 -
 Figure C.7: Relatively limited share of workers in import-competing industries, 2019
5.1%
5%
4.4%

4%
in import-competing industries
Share of population employed

3.6%
3.3% 3.2%
3%
2.6%

2%
1.7%

1% 0.9% 0.8% 0.8%

0.6%
0.4%
0.1% 0.0%
0%
t

ion

es

ion

es

il

ye

ia

ina

ea
yp

az
ric

pa
xic

an

es
rki
pin

tat

or
Ch
rat

Un
Eg

Br
Af
ail

Ja
Me

on

fK
Tü
dS
ilip
de

Th

uth
an

Ind

co
Fe

Ph

ite
pe

So

bli
Un
ian

ro

pu
Eu
ss

Re
Ru

Source: Authors’ calculations, based on OECD Trade in Value Added (TIVA) and Trade in Employment databases.
Note: The figure shows the employment share in import-competing industries for selected economies with large population and available data in
2019. Import-competing industries are defined as those with gross imports exceeding 15 per cent of output, representing the top 25 per cent of
industries in terms of import penetration in the database.

the effects of trade opening through consumption trade-opening because they spend a larger share
are. Recent studies have found that US consumption of their budget on food items, which are subject to
patterns, which may be representative of other high- comparatively high tariffs (Artuç, Porto and Rijkers,
income economies, are less varied along the income 2019). However, for households relying on the sale of
distribution than aggregate data suggests, since agricultural goods for their income, lower consumption
high-income households consume more imported prices may not necessarily make up for the loss of
varieties within sectors (Borusyak and Jaravel, 2021). income caused by the removal of tariff protection
As a result, consumption gains from trade may have (Nicita, Olarreaga and Porto, 2014).
no income bias in the United States. However,
Consumption gains from trade may be pro-
disaggregating the data even further shows that
poor not only because of different consumption
the origins of the imports matter. The imports from
patterns, but because low-income households
high-income economies are more significant in
are more sensitive to price changes. Recent studies
the consumption of high-income households. In
suggest that lower-income households are more likely
contrast, the import expenditure share of low-income
to switch to more affordable goods compared to higher-
households in the United States is larger for imports
income households when import prices decrease. For
from low-income economies, particularly China
instance, in Switzerland, a sudden decrease in import
(Jaccard, 2023). Similarly, direct-to-consumer US
prices was shown to increase welfare for lower-income
imports from China, which are exempted from tariffs
households by about 30 per cent more than higher-
under so-called “de minimis” rules,4 are predominantly
income households, because lower-income households
shipped to low-income regions in the United States,
adjusted their expenditure more (Auer et al., 2024).
disproportionately benefiting poorer households
Similarly, the poorest US households would gain four
(Fajgelbaum and Khandelwal, 2024).
and a half times more than the richest households from
Consumption gains from trade tend to favour the a 10 per cent reduction in US import costs due to higher
poorer segments of the population in developing price sensitivities (Waugh, 2023).
economies more. Trade-opening has been found
(c) D istortions and barriers can lead to
to lower prices particularly for goods consumed by
concentrated losses for some individuals
poorer households in some emerging economies
(Ural Marchand, 2012). Low-income households in The impact of trade on individuals is mediated by
developing economies benefit disproportionately from many factors that can lead to concentrated and

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HOW TO MAKE TRADE WORK FOR ALL C TRADE AND INCLUSIVENESS
WITHIN ECONOMIES

persistent losses for some individuals. Distortions qualifications, and do not have the same benefits and
and barriers, such as mobility costs, informality or protections as those in formal employment (ILO, 2023).
market power, impede adjustments by preventing Informality can slow down adjustment to trade shocks
individuals from moving towards gains from trade. They by locking in workers that fail to move towards more
also limit the reach of the gains from trade, for instance productive opportunities. For example, studies on
by impeding some groups from participating in trade. Brazil and Mexico have found that the informal sector,
In fact, the exposure to some of these distortions is which exhibits low entry barriers, absorbs workers
closely linked to education and income as well as to after import shocks and that those workers remain in
other regional or individual characteristics, such as the informal sector for extended periods, rather than
where people live or the types of jobs they have. As migrating to more productive regions or switching to
a result, where distortions and barriers are prevalent, formal employment in other sectors (Arias et al., 2018;
trade can aggravate existing inequalities in the Dix-Carneiro and Kovak, 2019). By allowing firms up to
absence of complementary policies. a certain size to operate without incurring formalization
costs, informality also discourages productive firms
(i) D
 istortions and barriers affecting from growing, for instance by capitalizing on export
the distributional impacts of trade are opportunities (Ulyssea, 2018; Dix-Carneiro et al.,
significant and varied 2024). As a result, informality both reduces the gains
Evidence suggests that the combined impact from trade and prevents workers from moving towards
of distortions and barriers can be large, even the gains from trade.
in high-income economies. While it is difficult High levels of market power enable firms not to
to quantify the impact of each distortion, proxies for pass lower costs on to workers and consumers,
the aggregate effects can be derived from observing and also reduce the ability of workers to move
mobility across occupations, sectors and regions, towards opportunities. There is evidence that firms
or by assessing the length of adjustment periods. with market power do not reduce prices in line with
Such proxies show that the adaptation costs to trade costs savings when trade-opening lowers input costs,
shocks for import-competing workers are high, and but rather increase their markups (De Loecker et al.,
that the gains from trade do not reach everyone. For 2016). In addition, a relevant share of trade-related
instance, studies show that the cost for workers of costs savings is absorbed by intermediaries that
switching sectors or occupations after trade shocks operate in non-competitive environments. A number of
is equivalent to several times a worker’s annual wage studies on agricultural exports suggests that farmers’
(Artuç, Chaudhuri and McLaren, 2010; Dix-Carneiro, incomes would be substantially higher if exporting
2014; Traiberman, 2019). While these costs matter intermediaries behaved competitively (Dhingra and
everywhere, they are particularly pronounced in Tenreyro, 2020; Dragusanu, Montero and Nunn, 2022).
developing economies, where they are estimated Evidence from Kenya, Nigeria and Ethiopia finds that
to be, on average, 33 per cent higher than in high- intermediaries capture most of the surplus of falling
income economies (Artuç, Lederman and Porto, 2015). world prices rather than passing it on to consumers
Similarly, mobility across regions tends to be relatively (Atkin and Donaldson, 2015; Bergquist and Dinerstein,
low within many economies, and such internal migration 2020).
does not, at least in the short run, respond significantly
to trade shocks (Topalova, 2007; Hakobyan and Market power matters not only in product
McLaren, 2016; Erten, Leight and Tregenna, 2019; markets but also in labour markets. This especially
Autor, Dorn and Hanson, 2023). As a result, an affects developing economies, where employer
economy’s adaptation to trade-opening tends to be concentration is particularly high (Armangue-Jubert,
relatively slow. Adjustment in some economies can Guner and Ruggieri, 2024). Wage markdowns have
been found to be largest for skilled workers in large
still be ongoing up to two decades after liberalization
firms, and this limits reallocation incentives towards
(Artuç, Chaudhuri and McLaren, 2010; Dix-Carneiro
these more productive firms (Castillo, Garcia-Marin
and Kovak, 2017; Autor, Dorn and Hanson, 2021).
and Tapia, 2023). The effects of trade on workers
A high degree of labour market informality can differ based on the market structure and the
hinders the adjustment to trade openness. Within market power of the firms involved in international
low-income economies, informal labour constitutes 89 trade. In labour markets with few employers relative
per cent of the overall employment landscape. Workers to workers (i.e., monopsony or oligopsony), export
in the informal sector typically earn lower incomes profits do not always reach workers and, instead, raise
compared to formal sector workers with similar profits of firms (Amodio, Medina and Morlacco, 2022;

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Felix, 2022; Amodio and Roux, 2024). Some large not reallocate capital, investments could not respond
exporting firms have been found to offer compensation to market opportunities, which increased misallocation
in the form of local amenities, such as housing or of investments and led to the exit of productive firms
schooling, instead of wages in order to reduce workers’ from the market (Lanteri, Medina and Tan, 2023).
mobility (Méndez and Van Patten, 2022). Trade may
Excessively restrictive labour market regulations
even worsen concentration in the labour market. For
may impede workers from moving towards more
example, in the United States, import competition from
productive firms and sectors. Strict employment
China enabled the only employers in the local labour
protection legislation can limit firms’ ability to lay
markets to leverage their market power and reduce
off workers in the short run in response to negative
wages (Benmelech, Bergman and Kim, 2018). This
shocks, thereby supporting employment and private
labour market concentration may have played a role
consumption. At the same time, strict employment
in the declining share of income allocated to labour,
legislation can also impede the wage adjustment
although current evidence does not find a strong link
between trade and labour share declines (Abdih and process and workers’ transition to more productive jobs,
Danninger, 2017; Karabarbounis, 2024). thereby delaying the labour and output adjustment to
new economic conditions (WTO, 2017). Research has
The presence of state-owned enterprises (SOEs) shown that stringent employment protection regulation
can limit the reach of gains from trade. SOEs may slows down the pace of job reallocation, especially
limit competition-based gains from trade. For instance, at large firms subject to more labour regulations and
some WTO accessions were found to reduce profits in sectors requiring labour adaptation (Haltiwanger,
but increase productivity for private firms, while SOEs Scarpetta and Schweiger, 2014). High dismissal costs
experienced no significant changes (Brandt et al., 2017; due to employment protection legislation were found to
Baccini, Impullitti and Malesky, 2019). Evidence further mitigate the unemployment effects of trade shocks but
shows that certain trade policy tools, such as licences, result in a low job reallocation rate, slowing down the
foreign direct investment restrictions or quotas, can adjustment to trade shocks and limiting the expansion
be particularly distortive in the presence of SOEs or of productive firms (Kambourov, 2009; Ruggieri, 2022).
otherwise politically connected firms, as they tend to be Internal migration restrictions also impose a cost on
the primary beneficiaries of such tools, which limits the adjusting to trade or other shocks. For instance, internal
expansion of more productive private firms (Khandelwal, migration restrictions in China were found to reduce
Schott and Wei, 2013; Rijkers, Freund and Nucifora, the welfare gains from trade-opening by 2 per cent (Zi,
2017; Naidu, Robinson and Young, 2021). SOEs may 2018). Capital market frictions and obstacles can also
also limit the pass-through of cost savings to consumer magnify the effects of labour market frictions on the
prices after tariff liberalization due to their lower distribution of the gains from trade by hindering the wage
sensitivity to costs (Han et al., 2016). adjustment process (Artuç, Brambilla and Porto, 2022).
Underdeveloped capital markets can Barriers to access to education reduce
substantially reduce exports and prevent adjustment to trade shocks. Retraining workers
adjustment to trade shocks. Trade is more to facilitate adaptation to a changing economic
finance-intensive than domestic transaction because environment could provide one solution to low labour
it requires capital for transportation, insurance and mobility. Barriers to education, such as distance
compliance with international regulations. As a result, or cost, have been shown to limit the adaptability
underdeveloped financial markets reduce both the of regions. Cities close to colleges or universities
number of firms that export and their export values respond better to the long-term decline of industries
(Kohn, Leibovici and Szkup, 2016). These effects are that provide the majority of local employment
not equal across firms, but are particularly severe for
(Gagliardi, Moretti and Serafinelli, 2023). While young
more financially constrained firms and firms operating
individuals in exposed regions are more likely to enrol
in capital-intensive sectors, whereas foreign-owned
in college, those from low-income households have
firms are less affected, as they can access capital
significantly lower enrolment rates compared to those
markets in several economies (Manova, 2013; Manova,
from wealthier households (Ferriere, Navarro and
Wei and Zhang, 2015). In addition, difficulties or
Reyes-Heroles, 2023).
obstacles for firms in reallocating capital across
products or plants, for instance because of smaller firm Weak institutions also lower the gains from
or market sizes, or due to the absence of secondary trade since inefficient contracting arrangements
markets, can slow down and distort adjustment. For reduce exports and imports. Importers from
example, a study on Peru found that when firms could economies with weak institutions are more often

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HOW TO MAKE TRADE WORK FOR ALL C TRADE AND INCLUSIVENESS
WITHIN ECONOMIES

required to use costly payment terms, like cash in specific industries, whose skills are not transferable,
advance, which limits consumption gains from trade suffer much larger earnings losses than workers in
(Antràs and Foley, 2015). One way to overcome less industry-specific regions after a rise in import
contractual frictions is via the use of relational competition (Yi, Mueller and Stegmaier, 2024).
contracts, which rely on past experiences between
Barriers to the flow of information reduce trade
buyer and seller and the expected future value of this
and limit price declines. A lack of information about
relationship. However, these arrangements can also be
products or prices in different sectors or regions
costly. Trade between partners in the early stages of
can significantly hinder the adjustment and the reach
a buyer-supplier relationship can be inefficiently low
of gains from trade. Information frictions in some
until sufficient trust is built (Brugués, 2023). Exporters
may be willing to forego a substantial share of their developing economies were estimated to account for
profits when spot market prices surge, in order to 50 per cent of the price dispersion across markets,
serve relational buyers at fixed prices (Macchiavello representing two thirds of the size of regulatory and
and Morjaria, 2015). Managers may assign highly physical trade costs (Allen, 2014; Startz, 2017).
productive workers to serve foreign buyers with Several studies have found that the introduction of
which firms have relational contracts, as a means of new technologies allowed producers to better match
protecting the relationship, even if these workers would supply to demand in other markets and increase
provide more value elsewhere (Adhvaryu et al., 2020). domestic or international trade (Jensen, 2007; Juhász
and Steinwender, 2018). Increasing the availability of
High internal trade costs mute the impact price information can further reduce price dispersion
of trade on prices and limit access to export (Aker, 2010; Steinwender, 2018).
opportunities. A lack of infrastructure or an efficient
logistics sector can cause domestic shipping costs Barriers to the flow of information about
to exceed international shipping costs. This hurts new job and export opportunities and about
both consumers and workers in regions dependent on regulations in export markets can hinder export
domestic shipping. In fact, the lack of pass-through growth. Workers need information about new job
from falling world prices to regions within an economy opportunities to make informed decisions about their
is not just due to intermediary market power, but also career advancement and skills development. Research
due to high internal trade costs (Atkin and Donaldson, indicates that individuals strongly underestimate the
2015). In addition, underdeveloped infrastructure potential returns from both migration and education,
reduces the number of people that move towards and are therefore reluctant to move or to obtain skills
locations specialized in comparative advantage that are required by exporters. Simple interventions
sectors (Fajgelbaum and Redding, 2022). In line with targeting these information gaps have been shown to
these different effects, improvements in domestic substantially increase the likelihood that workers in
infrastructure have been shown to spread the gains some middle-income economies will access trade-
from trade more widely in different settings (Donaldson, related opportunities (Jensen, 2012; Baseler, 2023).
2015; Redding and Turner, 2015). Moreover, in the case Meanwhile, domestic firms wishing to participate in
of border regions, trade liberalization with neighbouring international trade need to gather essential information,
economies can help remote regions by moving them including about export market regulations, market
from the periphery to the centre of expanding bilateral potential for their products, and the availability and
trade (Bonadio et al., 2023). reliability of foreign importers. However, this process
can be significantly slow and costly, and can impede
High degrees of regional concentration impede
or delay the adjustment to trade-opening by slowing
adjustment to trade shocks. Given how domestic
the expansion of the most productive firms to export
barriers affect internal migration, more specialized
markets, and the entry and exit of less productive
local labour markets may struggle to adjust to import
firms (Eaton et al., 2021). This delay explains why the
competition. Cities highly dependent on a single
dynamic gains from trade openness are larger than the
sector were found to respond substantially worse to
static gains (Alessandria, Choi and Ruhl, 2021).
the decline of that sector compared to more diversified
cities in several high-income economies (Gagliardi, Norms, habits, or local identities can further
Moretti and Serafinelli, 2023; Helblich et al., 2023). hamper the adjustment process to trade
Effects have been particularly strong in the cities in openness. Cultural factors, such as family structure,
the so-called Rust Belt of the United States, pointing social capital, and ethnic and racial diversity, play
to geographical distance as a potentially relevant a significant role in determining economic mobility
factor. Meanwhile, workers in regions dependent on (Chetty et al., 2014). Rigid social structures can

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shape individuals’ mobility towards specific economic
Figure C.8: Lower participation of MSMEs in
opportunities, affecting their educational and
international trade
geographical choices (Munshi and Rosenzweig, 2006,
2016). Strong local identity can also limit occupational 36%
35%
and geographical mobility (Munshi and Wilson, 2008). 6%
Limited economic mobility often results in missed 30%

Average share of firms exporting

job opportunities, as individuals may be unable to 25%
move to areas or sectors with better employment 20%
20%
prospects, thereby constraining the potential gains
6%
from trade openness. 15% 30%
11%
(ii) D
 istortions and barriers disproportionately 10% 3%
15%
affect certain groups 5%
8%
Distortions and barriers matter for inclusiveness 0%
because certain groups are particularly exposed Small firms Medium-sized firms Large firms
(5-19 employees) (20-99 employees) (>100 employees)
to their detrimental effects. Aggregate statistics
Direct exports Indirect exports
might fail to capture important trends at a more
disaggregate level, such as disparities between local Source: Authors’ calculations, based on World Bank Enterprise
areas or social groups. For instance, certain groups Surveys.
Note: The figure displays the average share of firms exporting by
are disproportionately less likely to benefit from poverty firm size. Exporters are defined as firms with an export share of
reduction. As of 2024, 10 per cent of women globally at least 10 per cent of total sales. Indirect exports correspond to
products sold domestically to third party that exports products.
still live in extreme poverty. Furthermore, the incidence
The analysis covers all available economies, based on the latest
of poverty can differ substantially across subnational year available for each economy. Figures have been rounded up to
regions, with rural areas, which are home to 84 per cent the nearest whole number.

of the world’s poor, being notoriously poorer than their

urban counterparts (ILO, 2023). These underlying
participation to trade can prove very beneficial, given
trends are important because they can help identify
that, in a majority of economies, MSMEs account for
particular groups or areas that are less likely to benefit
from trade or other sources of welfare gain, often a significant proportion of employment (WTO, 2016).
because they are more affected by distortions and The low participation of MSMEs in international trade
barriers. For instance, evidence shows consistently is, in part, attributed to their heightened vulnerability
that four groups – women, micro, small and medium- to imperfect capital markets. MSMEs often encounter
sized enterprises (MSMEs), unskilled workers, and higher credit rationing, screening expenses and interest
workers in rural or remote areas – have less access rates in comparison to larger corporations. They face
to gains from trade because of economy-wide significant credit constraints, with approximately half
frictions and their specific constraints to accessing of their trade finance applications being declined, a
international market or adjusting to trade shocks. stark contrast to the mere 7 per cent rejection rate
While less evidence is available for other groups, experienced by MNEs (ADB et al., 2023; IFC and
such as indigenous peoples and other minorities, it WTO, 2023). Evidence from West Africa suggests
is likely that similar channels limit their gains as well that MSMEs customarily pay higher interest rates
(see Box C.4). than large corporate firms for trade finance. In Côte
d’Ivoire and Senegal, large companies may be charged
(iii) Micro, small and medium-sized enterprises
4 to 5 per cent over the refinancing rates, while the
Trade provides important opportunities to corresponding premium for MSMEs stands at 7 to
MSMEs, but barriers, such as limited access to 9 per cent (IFC and WTO, 2022). This is particularly
capital, limit their capacity to export. According challenging given the costly conformity assessment
to the World Bank Enterprise Surveys, 5 only 11 per procedures associated with regulations and standards
cent of small firms, and 20 per cent of medium-sized in export markets (ITC, 2016). It also reinforces the
firms, export, compared to 36 per cent of large firms, negative effects of weak institutions, as they may
(see Figure C.8). MSMEs are less likely to trade than require MSMEs engaged in trade to provide more
large firms. One reason for this is that they are less upfront capital in transactions, for instance through
productive than large firms. However, MSMEs engaged costly payment terms such as cash in advance.
in exporting activities can enhance their productivity
and grow through learning effects and economies of Obstacles to obtaining information and
scale. Understanding the issues that hinder MSMEs’ distributional costs are additional major barriers

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HOW TO MAKE TRADE WORK FOR ALL C TRADE AND INCLUSIVENESS
WITHIN ECONOMIES

Box C.4: Trade and indigenous peoples

Trade-related economic activities, such as mining or infrastructure development, can harm vulnerable
populations, such as indigenous peoples, when domestic policies are ineffective in protecting indigenous
peoples’ land, self-governance and cultural rights, in preventing deforestation and its impacts on livelihoods,
and in ensuring access to essential services, including clean water and health (UNCTAD, 2014; OHCHR,
2016; Ceddia, Gunter and Pazienza, 2019). Inadequate intellectual property protection of indigenous
peoples’ traditional knowledge also make them vulnerable to unauthorized use or misappropriation of that
knowledge, leading to commercial losses and the erosion of their cultural heritage (Goff, 2021).

While information on the participation of indigenous businesses in trade is still limited, indigenous communities
have relatively low involvement in international trade. Recent studies on indigenous business in Canada reveal
that indigenous-owned MSMEs are underrepresented among exporting firms, with 7.2 per cent of indigenous-
owned MSMEs exporting in 2020 compared the average Canadian MSME rate of 12.1 per cent (Canadian
Council for Aboriginal Business and Global Affairs Canada, 2023; Global Affairs Canada, 2023). The limited
participation of indigenous communities in international trade can be attributed to various factors. According
to the Canadian survey, the top export obstacles identified by indigenous-owned MSMEs are remoteness
issues (including distance to customers, transportation costs and brokerage fees), knowledge issues (such
as a lack of knowledge of local languages and cultures, or limited awareness of potential export markets)
and border obstacles (including tariffs, non-tariff barriers, import quotas, customs duties and border security
issues). Digital technologies are an important enabler for indigenous businesses to export. The likelihood of an
indigenous-owned MSME exporting is six times higher when it utilizes e-commerce.

for MSMEs wishing to export. MSMEs often report a majority of regions saw a constant or slightly falling
comparatively greater impediments to finding foreign gender wage gap until 2019, recent estimates report
trading partners and to assessing demand for their a sharp rise in the post-pandemic years, showing that
products abroad, as well as resulting from customs the pandemic hit female workers particularly hard
procedures or language barriers (WTO, 2016; 2024a). (Edwards, 2020). The slow decline in gender income
MSMEs are also more affected than larger firms by inequality causes absolute gender inequality to remain
geographical remoteness, as logistical and distribution high. Only 16 per cent of the top 1 per cent of labour
costs account for a much larger share of their total income earners are women (Piketty, Saez and Zucman,
costs than for larger firms (WTO, 2016). 2018). Women globally are under-represented in high-
Even when MSMEs export, the market power wage jobs, but over-represented in low-paying jobs
of large firms can limit their gains from trade. (Ortiz-Ospina and Roser, 2023).
MSMEs have, in most instances, substantially less
Trade is an important channel to boost female
bargaining power than MNEs in global supply chains.
economic empowerment, but limited access to
Some value chains are organized around lead firms that
capital reduces their ability to trade. Companies
control a number of dependent suppliers – so-called
involved in international trade tend to employ a relatively
“captive value chains” – in which small suppliers hold
higher percentage of women. In developing nations,
close to no bargaining power (Gereffi, Humphrey and
women comprise 33.2 per cent of the workforce in
Sturgeon, 2005). As a result of these market power
firms that engage in international trade, compared to
asymmetries, small suppliers, such as of coffee and
garments, often receive lower prices (Boudreau, 24.3 per cent in companies that do not export, and
Cajal-Grossi and Macchiavello, 2023). 28.1 per cent in those that do not import. In addition,
women are more prevalent in companies participating
(iv) Women in GVCs and in foreign-owned enterprises. Women
Gender income inequality is high even though make up 36.7 per cent of the workforce in GVC firms
there is a slow but steady decline globally. and 37.8 per cent in foreign-owned firms, which is 10.9
According to the World Inequality Database,6 women’s and 12.2 percentage points higher, respectively, than in
share of pre-tax labour income marked a continuous non-GVC and domestically-owned companies (World
increase in the last three decades, from an average of Bank and WTO, 2020). There is a large literature that
27.1 per cent in 1995 to 30.3 per cent in 2019. While shows that women have less access to capital and

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are particularly affected by imperfect capital markets.
Figure C.9: Lower participation of firms owned
For instance, data from almost 10,000 firms surveyed
by women in international trade
in the Future of Business Survey7 reveal that only
12 per cent of businesses led by women had received 15%

a bank loan, in contrast to 20 per cent of those led by 14%

men. Women entrepreneurs are less likely than men to 12%

utilize bank loans, and they often receive smaller loan

majority-owned by women
10%

Average share of firms

10%
amounts with higher interest rates and stricter collateral
requirements (OECD, 2023b). These differences are 8%
7%
particularly stark in trade. Women-owned businesses 6%
face a 50 per cent higher rejection rate in traditional
4%
trade finance applications compared to those owned
by men (DiCaprio, Kim and Beck, 2017). In a recent 2%
study on trade finance in the Mekong area, among the
0%
few banks that provided gender-disaggregated data Domestic firms Exporting firms Foreign direct
investment firms
3 per cent was the highest share of the bank’s total
trade finance allocated to women-owned businesses Source: Authors’ calculations, based on World Bank Enterprise
(IFC and WTO, 2023). Surveys.
Note: The figure displays the average share of women-owned
firms engaged in domestic and international trade and those with
Norms and barriers to information can further
foreign direct investment participation. Exporters are defined as
limit access to capital and cause other obstacles firms with an export share of at least 10 per cent of total sales.
that reduce women’s participation in trade. Strict Foreign direct investment firms are those with at least 10 per cent
foreign ownership. The analysis covers all available economies,
credit requirements, combined with gender-based based on the latest year available for each economy.
social, cultural and legal barriers, can hinder MSMEs
owned by women from accessing more formal financing
sources (ITC, 2015; IFC, 2021). For instance, norms in by MSMEs, as discussed above (World Bank and
some economies prevent women from having access to WTO, 2020). Female workers and business-owners
collateral due to inheritance or ownership restrictions. also face specific mobility constraints that limit their
Social norms can limit women’s educational options ability to adjust to new job opportunities. Evidence
and careers, as their available time may be restricted suggests that while men and women may be equally
due to expectations that they will spend more time than mobile geographically, men are more likely to move for
men on childrearing or other domestic responsibilities. professional reasons, while women more often move
These factors affect how women adjust to economic for social reasons, such as for family reasons (Orkoh
changes and engage in trade (World Bank and WTO, and Stolzenburg, 2020).
2020). Norms can also impact information access. (v) Rural areas
Professional networks are important for obtaining
Inequality between regions within an economy
relevant information on foreign markets, partners and
can be large, especially in trade. In 2016, real
distributors and, as women often have smaller and less
GDP per capita in regions of advanced economies
extensive professional networks compared to men, this
at the 90th percentile was 70 per cent higher
increases the hurdles that women tend to encounter
than that in regions at the 10 th percentile (IMF,
when navigating both domestic customs procedures
2019). Most OECD economies have experienced
and foreign regulations (Korinek, Moïsé and Tange,
a sustained increase in regional inequality (OECD,
2021; Sazedj and Tavares, 2022).
2023a). Regional concentration in trade tends to
In light of these barriers, firms owned by women be even stronger. Evidence from the United States
are less likely to engage in international trade shows a strong correlation between the population
and adjust to trade shocks less well, compared density of US states and their export shares (see
to firms owned by men. According to the World Figure C.10). Similar patterns are observed in
Bank Enterprise Surveys, only 7 per cent of firms with several other advanced and emerging economies
at least 10 per cent foreign ownership are owned by when comparing city size and exports (Bakker et al.,
women, and only 10 per cent of exporting firms are 2024). However, data from the Luxembourg Income
owned by women, in contrast to 15 per cent of purely Study 8 suggest that some middle-income economies
domestic firms (see Figure C.9). This is in line with the witnessed a significant increase in the ratio of rural
evidence that businesses owned by women tend to to urban earnings, from 56.4 per cent in 2005 to
be smaller and, hence, face the same obstacles faced 72.4 per cent in 2019. Regional disparities in emerging

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TRADE AND INCLUSIVENESS:
HOW TO MAKE TRADE WORK FOR ALL C TRADE AND INCLUSIVENESS
WITHIN ECONOMIES

infrastructure in rural areas can also aggravate

Figure C.10: Lower participation of the US rural
information barriers. There is a persistent and sizeable
population in international trade
digital divide between rural and urban areas (ITU,
2023a), which prevents rural firms from accessing
60%
information about export opportunities (World Bank
Share of rural population in US states

50% and WTO, 2023b).

40% Workers in rural areas displaced by import

competition face greater challenges in adapting
30%
due to limited regional economic diversity.
20%
Economic activities in rural areas tend to be less
diversified than in urban areas. For instance, larger
10% metropolitan areas in the United States tend to have a
wider variety of economic activities and industries than
0%
0% 1% 2% 3% 4% 5% smaller areas (Duranton and Puga, 2000; Macheras
Share of US states' exports in total US exports and Stanley, 2017). Similarly, employment in rural areas
in the European Union tends to be concentrated in a
Source: Authors’ calculations, based on US Census Bureau as narrower range of economic activities (Eurostat, 2013).
reported by the National Bureau of Economic Research (NBER). In developing economies, where rural areas rely to a
Note: The figure displays the correlation between the share of
rural population in US states and the share of those US states’ large extent on agriculture, the lack of diversification
exports in the total US exports. Texas and California were omitted is even more pronounced (ILO, 2019). The limited
from the chart for readability with minor impact on the trendline.
economic activities and possibilities for mobility in
rural regions make it harder for rural residents to find
economies have trended down since 2010, after rising new jobs or invest in new professional activities, which
in the early 2000s, with the average speed of regional increases the adjustment difficulties they may face due
convergence picking up to more than 1 per cent by to trade openness.
2016 (IMF, 2019). (vi) Unskilled workers
Gains from trade in rural areas are negatively Wage inequality has been stagnant over the past
affected by underdeveloped infrastructure, decade, with recent data indicating a decline
information frictions and market power of in some economies. According to ILO data for
intermediaries. Consumers in remote areas of 38 economies, the skills premium – the ratio of
developing economies have been found to benefit from earnings of high-skilled relative to low-skilled workers
only a small part of the gains that result from falling – fell from 2.3 in 2010 to 2.2 in 2022, with the
international trade barriers (Atkin and Donaldson, premium being highest in middle-income economies,
2015). The pass-through from tariff reductions followed by high- and low-income economies. A
to prices is also lower in rural areas in emerging recent study finds that, following the COVID-19
economies, with lower consumption gains in areas pandemic, considerable wage growth at the lower end
further away from ports or borders (Ural Marchand, of the distribution offset approximately 38 per cent of
2012; Nicita, 2009). Even in high-income economies the increase in US wage inequality since 1980 (Autor,
with lower intra-national trade costs, the differential Dube and McGrew, 2023). In Germany, the ratio of
incidence of consumption gains from trade between top-decile to bottom-decile incomes declined by
rural and urban areas appears to be large. A recent 10 per cent between 2022 and 2023 (Federal
study suggests that the inhabitants of urban centres in Statistical Office of Germany, 2024). This recent
the United States spend a much larger share of their stabilization of wage inequality has been preceded by
expenditure on imports and, hence, would enjoy 16 to a steady increase in the skills premium in the 1980s
26 per cent larger welfare gains from trade-opening and 1990s (Katz and Autor, 1999).
than inhabitants of rural areas (Jaccard, 2023). Rural Exporters tend to have a larger skill premium,
disparities can also contribute to missed trading given that export trade is relatively skill-
opportunities. For instance, internal trade costs can intensive, which limits the gains from trade for
prevent producers in rural areas from accessing low-skilled workers. Exporting firm have a larger
markets that reward quality upgrading, keeping these demand for skills because export trade requires more
producers locked in low quality production unsuitable managerial roles covering different tasks, such as
for exports (Bold et al., 2022). Underdeveloped managing foreign regulations or global distribution.

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 According to the World Bank Enterprise Surveys, More restricted access to capital further limits the
exporting firms tend to employ a higher proportion of adjustment of unskilled workers to trade shocks.
non-production workers, such as managers, lawyers There is a strong correlation between education and
and marketing or logistics specialists, compared to wealth (Pfeffer, 2018). Since adjustment to economic
non-exporting firms. Conversely, exporting firms tend shocks like import competition often requires
to employ a relatively lower proportion of low-skilled resources, such as financing periods of unemployment
workers (see Figure C.11). The need for specialized or retraining, this limits adjustment of unskilled workers,
expertise leads exporters to reward skills more than who usually have fewer financial resources. Differences
firms not involved in foreign sales, resulting in a larger in access to capital aggravate this relationship. Workers
skills premium for exporters (Brambilla et al., 2012; with lower levels of education and fewer skills tend to
Burstein and Vogel, 2017; Madanizadeh, 2021). receive fewer job offers from distant locations and take
Distortions and barriers, such as norms or longer to relocate after experiencing local disruptions.
informality, can aggravate the unequal access of For instance, in the United States, 2 per cent of
low-skilled workers to gains from trade. While the premature high school-leavers move states annually in
education levels of unskilled workers are low by definition, the first year after leaving school, compared to 9 per
norms and social factors often lead to a high degree of cent of postgraduate degree-holders in the first year
intergenerational persistence in educational outcomes after completing their degree (Amior, 2024).
(Chetty et al., 2014; van der Weide et al., 2024). This is
also related to unequal access to education in economies 3. F
 airer trade policies and
where schooling is costly. Displaced unskilled workers domestic complementary
from low-income households can lack the financial
resources needed to acquire new skills and transition
policies are crucial to make
to sectors that are not affected by import competition trade more inclusive
(Ferriere, Navarro and Reyes-Heroles, 2023). Norms and
social factors may also limit occupational choices, to the Trade policies are often set at the economy-wide
detriment of unskilled workers in economies with a large level, but their effects tend to be unequal across
informal sector. Evidence shows that being unskilled is the population. Tariffs and non-tariff measures (NTMs),
strongly correlated with working in the informal sector, for instance, usually apply equally to all importers,
which lacks access to export opportunities (OECD, independent of their size or location. However, this
2024). does not mean that their effects are identical for all. As
consumption and employment differ across individuals,
so does the impact of trade. As a result, setting trade
policy in such a way that it does not inadvertently
Figure C.11: Lower share of low-skilled workers disadvantage certain groups is important to make trade
in exporting firms more inclusive, although effects might be relatively small.
Conversely, trade policy is sometimes set to shield
73.1%
73% certain groups from import competition; however, such
interventions tend to impose significant costs on other
Average share of production workers

parts of the economy and fail to reach their objectives.

among firm's employees

72% Domestic distortions and barriers can lead

to unequal effects from trade-opening, and
71.3%
domestic policies are required to address them.
71% Trade policy can make access to trade more inclusive,
and it can also help reduce distortions and barriers.
However, since these distortions and barriers are
70% rooted in structural causes, they need to be addressed
Domestic firms Exporting firms through domestic policies in order to support a more
inclusive economy.
Source: Authors’ calculations, based on World Bank Enterprise
Surveys.
(a) T
ariffs and NTMs have uneven effects on
Note: The figure displays the average share of production workers
in firms engaged in domestic and international trade. Exporters individuals
are defined as firms with an export share of at least 10 per cent of
total sales. The analysis covers all available economies, based on Tariff incidence across the population is
the latest year available for each economy.
unequal, with low-income households typically

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facing higher tariffs on their consumption. The Bekkers et al., 2024). However, such measures often
application of higher tariffs to products commonly fail to increase the welfare of the protected individuals
used by low-income households and to lower-value when the employment impact of protective trade policy
varieties within the same product category significantly is offset by higher consumer prices and reduced
increases the tariff burden on lower-income consumption. Protective trade policy may also fail if
households compared to higher-income households. tariff increases lead to retaliation by trading partners,
As a result, the tariff burden of the poorest 10 per cent thereby impacting negatively protected and non-
is about five times higher than that of the richest 10 protected sectors in the economy by limiting foreign
per cent (Furman, Russ and Shambaugh, 2017; Acosta market access (Fajgelbaum et al., 2020; Autor et al.,
and Cox, 2024). A disproportionate burden of tariffs 2024). For instance, the Smoot-Hawley Tariff Act of
on low-income households has also been found in a 1930 raised the average tariff rate on US dutiable
large number of developing economies, mainly due imports by 19 percentage points, and this is estimated
to high tariffs on food items (Ural Marchand, 2012, to have led to a 4 to 8 per cent decrease in import
2019; Artuç, Porto and Rijkers, 2021). However, there volumes. However, retaliatory tariff responses from
are also progressive aspects of tariff schedules. For other economies caused exports to drop by 28 to
instance, in the United States, poorer households 32 per cent, resulting in significant welfare losses for
import a significantly higher volume of low-value goods all the economies involved (Irwin, 1998; Mitchener,
that are exempt from tariffs under “de minimis” rules O’Rourke and Wandschneider, 2022). Due to political
(Fajgelbaum and Khandelwal, 2024). and economic factors, protective trade policy can
also create lock-in effects, causing tariffs to remain in
Tariffs tend to place a larger burden on women’s place even when protected sectors no longer require
consumption than on that of men. Evidence protection, while continuing to place a higher burden
across a broad set of economies finds that women, on low-income households (Acosta and Cox, 2024).
or households headed by women, pay relatively more Some GVC settings can also make some restrictive
tariffs, as they have a larger expenditure share on trade policies, such as antidumping duties, less
high-tariff items. For instance, households headed effective, as targeted firms can circumvent these trade
by women allocate a larger portion of their budget restrictions by relocating production to alternative
to agricultural products, which are often subject to plants in non-targeted third markets (Flaaen, Hortaçsu
high tariffs. This compresses their real income by 0.6 and Tintelnot, 2020).
percentage points relative to households headed by
men (Artuç et al., 2023). This gender disparity also Protective trade policy can raise costs in
applies to manufacturing products, including apparel downstream sectors, which can more than offset
(Gailes et al., 2018). the positive employment impact on protected
industries. Restrictive trade policy on intermediates
Temporary trade barriers and NTMs can can increase input costs, making downstream
reinforce the regressive impact of trade sectors less competitive in third markets and thereby
policy on consumption. Increased MFN tariffs, substantially reducing their exports (Flaaen and Pierce,
anti-dumping duties and safeguards measures 2019; Handley, Kamal and Monarch, 2024). Women are
on a number of consumption goods were found likely to be more affected by this situation, as sectors
to increase their prices substantially. Since these with higher numbers of female employees face higher
goods were disproportionately consumed by low- tariffs not only on their outputs, but also on their inputs,
income households in some emerging economies, due to trade protection of their upstream sectors (World
these measures resulted in welfare losses among the Bank and WTO, 2020; Bekkers et al., 2024).
poorest households that were twice as high as those
While export restrictions are sometimes
of the richest households (Edwards et al., 2022).
implemented to protect consumers, they
The regressive nature of tariffs and NTMs is often often prove ineffective due to the potential
linked to protecting specific groups of workers, for retaliatory responses. During crises, some
but such protection tends to be ineffective. Many governments may seek to protect consumers from
studies of a large number of economies have found that shortages or higher prices by implementing export
tariffs are higher, and NTMs more costly, in sectors that restrictions. Recently, WTO trade monitoring data
employ more low-wage workers or women, shielding showed, for instance, how the COVID-19 pandemic
them from import competition (Mendoza, Nayyar and and the onset of the war in Ukraine led to sharp
Piermartini, 2018; Nicita, Olarreaga and Porto, 2014; increases in export restrictions, often on food items
Ural Marchand, 2019; Artuç, Porto and Rijkers, 2019; (WTO, 2020a; 2023a). While such measures might

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constrain prices in the short run, they tend to aggravate Section C.3(a), trade tends to reduce informality by
crises elsewhere and to reduce crisis preparedness increasing the number of formal job opportunities. This
at home in the mid- to long-term, as they reduce the effect can substantially amplify the welfare gains from
incentives for producers to invest in capacity (WTO, trade liberalization by reducing resource misallocation
2021b; Bacchetta et al., 2024). For instance, export in economies with large informal markets (Dix-Carneiro
restrictions on food items can be contagious, leading et al., 2024). Trade can also help to address the issue
net importing economies to take counteracting of product market power. When tariffs are reduced, the
measures that drive up the global prices of food items, heightened competition from abroad can compel firms
which undermines the original policy (Giordani, Rocha to reduce their markups and consequently their prices
and Ruta, 2016). (Lu and Yu, 2015; Brandt et al., 2017; Gonzalez-Garcia
and Yang, 2020; Impullitti and Kazmi, 2022). Trade can
Reforming trade policies to address biases in
also alleviate the distortions introduced by inefficient
tariffs or NTMs can support inclusive trade. As
SOEs by shifting resources to private exporting firms,
discussed above, while the protective effects of tariff
thereby magnifying the gains from trade (Khandelwal,
schedules and NTMs on domestic industries tend to
Schott and Wei, 2013).
be limited, these measures tend to disproportionately
impact women, low-income households and MSMES. Trade-opening can alleviate the impact of some
Removing these biases can contribute to making trade obstacles in markets for factors of production.
more inclusive. For instance, improving agricultural Trade has been found to substitute partially for
market access to high-income markets significantly financial development, and it reduces misallocation
reduced poverty in rural areas of low- and middle- of resources across firms by raising the profits of the
income economies (Porto, 2010; McCaig, 2011). At the most productive firms (Finlay, 2024). Export profits
aggregate level, rectifying trade policy biases tends can reduce the financial constraints of firms (Kohn,
to yield only small positive impacts on inclusiveness Leibovici and Szkup, 2016). GVCs are a key aspect
globally, as gains in equality in some economies may of how trade reduces capital constraints in financially
be offset by losses in others (Nicita, Olarreaga and less developed markets. Some lead firms in GVCs
Porto, 2014; Artuç, Porto and Rijkers, 2019; Bekkers were found to improve the liquidity of some financially
et al., 2024). constrained firms in the supply chain by providing
financial support (Park, Lundquist and Stolzenburg,
Trade policy can also support inclusiveness
2023). Export opportunities have also been found to
by helping to address distortions and barriers
incentivize local politicians to remove labour market
that hinder equal participation. Trade costs may
barriers to internal migration (Tian, 2024). Trade can
not only impose higher burdens on some groups, but
also contribute to institutional reforms that strengthen
may also indirectly amplify distortions and barriers.
contracting institutions (Nunn and Trefler, 2014).
Lowering barriers to services trade is particularly
important to make trade more inclusive. For instance, (b) D
 omestic policies are essential to make
lowering barriers to trade in telecommunications and trade more inclusive
computer services can help to bridge the digital divide
Making trade more inclusive is essential. The
(World Bank and WTO, 2023a). Facilitating trade in
disparity between individuals who can effectively adjust
financial services can also help to mitigate distortions
to and prosper from trade openness, and those who
associated with imperfect capital markets, including
cannot, poses a risk of widening inequality across social
higher prices, reduced consumer choice and resource
classes, regions, genders and age groups. Excessive
allocation inefficiencies, by boosting the productivity
inequality can be a hindrance within economies by
of firms that rely on these services (Arnold, Javorcik
impeding access to essential training and healthcare for
and Mattoo, 2011; Arnold et al., 2015). Trade-opening
the less fortunate or for the unemployed, thereby fuelling
of high-skill services has also been shown to increase
political tensions and potentially eroding support for
educational attainment, especially for girls, as high
trade openness (see the opinion piece by Stephanie
incomes in the sector lowered the relative cost of
Walter). The decision of whether and how to address
schooling and provided higher returns to education
inclusiveness rests with each government. While there
(Nano et al., 2021). Reducing services trade costs and
is no “one size fits all” approach, economic growth,
implementing digitalization reforms could contribute to
institutional reforms and sustainable debt management
narrowing the gender wage gap (Bekkers et al., 2024).
are important enablers to address inclusiveness.
Trade openness can help to address distortions Improving resources mobilization is also an important
linked to market structures. As discussed in factor for inclusiveness, especially in lower-income

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economies in which high external debt services and Passive labour market policies are critical to
limited tax revenues significantly limit policy flexibilities. reduce negative local spillovers and to facilitate
adjustment to trade shocks. Passive labour market
Addressing inequality and promoting an inclusive
policies, such as unemployment benefits and other
economy require domestic policy reforms,
income support schemes, can mitigate the negative
rather than just trade policy reforms. Domestic
income effects of trade shocks (Bacchetta, Milet
policies to address inequality and inclusiveness
and Monteiro, 2019). These policies can facilitate
encompass a broad range of measures aimed at
adjustment by allowing displaced workers to invest
reducing disparities in income and improving access
more time in finding the right job match, which
to opportunities and resources among different social
can lead to higher long-term incomes for workers,
groups within the economy. Given the vast scope of
and increased productivity for firms and the wider
these domestic policies, the following discussion
economy (Nekoei and Weber, 2017; Farooq, Kugler
focuses on a few select areas particularly relevant
and Muratori, 2020). Concentrated income losses in a
to the relationship between trade and inequality.9
local labour market, even in the short term, can result
Although trade policy reforms can contribute to
in reduced local consumption expenditure, potentially
inclusiveness, domestic policies play a key role in
leading to job losses in sectors not directly affected
this endeavour, including by making trade work for all.
by the initial shock. Passive labour market policies can
Unlike trade policy reforms, which primarily impact
help to mitigate such negative expenditure spillovers.
international trade dynamics, domestic policies have a
However, these policies are sometimes criticized
more comprehensive reach, affecting the fundamental
as being insufficient, as they cannot compensate
aspects of an economy and society that contribute
for the non-monetary value of jobs such as personal
to inequality and inclusiveness, including education,
growth opportunities, flexible work arrangements and
taxation and social protection. For instance, the
recognition (Young, 2012; Helliwell and Huang, 2014).
quality of education and effective tax rates show
stronger negative correlations with different inequality Active labour market policies can substantially
measures than trade openness (see Figure C.12). accelerate adjustment to trade shocks. These
Numerous studies point to the crucial role that policies operate through training or job search
providing equal access to education plays in reducing assistance, on-the-job training and direct job creation.
inequality (Chetty et al., 2020) and to the robust long- Active labour market policies tend to increase the
term correlation between taxation and reduced income efficiency of the labour market by easing job searches
inequality (Piketty, 2003; Piketty and Saez, 2003; and reducing the obstacles between workers and
Atkinson, Piketty and Saez, 2011; World Bank, 2022). vacancies. For instance, wage insurance programmes,

Figure C.12: Stronger correlation between inequality and education or taxation than trade openness, 2022

Trade openness Education Taxation

0.0

-0.1 -0.07
Estimated correlation coefficient

-0.2
-0.21

-0.3
-0.30

-0.4

-0.5
-0.51 -0.50
-0.55
-0.6

Correlation with top 1% income share Correlation with Gini inequality index

Source: Authors’ calculations, based on World Inequality Database, UN Comtrade, OECD PISA Database and OECD Tax Database.
Note: The figure displays the estimated correlation coefficients between trade openness, education quality or effective tax rates and two
different measures of inequality, namely the Gini coefficient for income and the share of total income received by the 1 per cent highest income
earners. The correlation coefficients were normalized to allow for a comparison across different variables that are measured in different units.

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 Opinion piece

The complex interplay between inequality and

attitudes about globalization
By Stefanie Walter

Professor for International Relations and Political Economy, University of Zurich

It is often assumed that there is a strong link between Third, the most vocal critics of globalization are usually
inequality and attitudes to globalization, i.e., scepticism or not those individuals who have been hit hardest by
openness to globalization. After all, trade and other forms globalization, but those who are worried about their
of globalization have significant distributional effects, economic and societal status going forward (Kurer,
which suggests that those who are negatively affected 2020). Such status anxiety is often caused by broad
are likely to be much more sceptical about globalization societal and economic transformations, including – but
than those on the “winning” side. not limited to – transformations caused by globalization.

Indeed, some of the biggest differences in views about One of these structural changes is a decline in cross-
globalization are related to inequalities in education and to country inequality. Several developing economies have
regional economic inequality. Well-educated people, who been catching up with developed economies, and this is
tend to benefit the most from globalization, usually hold becoming increasingly visible to ordinary people in the
more positive views about it than people with lower levels developed economies, as these developing economies
of education (Menéndez González, Owen and Walter, have started to export products that are globally
2023). And backlashes against globalization tend to be competitive in areas that used to be the key comparative
strongest in regions that have been negatively affected by advantage of developed economies. These developing
economic shocks (such as trade or automation shocks). economies possess high-quality infrastructures that may
Support for populist and nationalist policies, parties be equal to, and sometimes better than, those of many
and politicians tends to be higher in those regions (e.g., Western countries. By hosting major sports events, like
Colantone and Stanig, 2018; Milner, 2021). the Fédération Internationale de Football Association
(FIFA) World Cup or the Olympics, these advances have
Despite these trends, the relationship between inequality
become visible to the wider global public.
and globalization backlashes is less straightforward than
it may initially appear. In these “rising” economies, many people see the current
era – and globalization more generally – as an opportunity.
First, popular backlash against political and socio-
These economies have also become more assertive
cultural globalization is often stronger than the backlash
at the international level, and are demanding more
against economic globalization (Margalit, 2012). Many
influence, to better reflect their growing economic weight
populist right-wing parties, for example, support free
and their priorities. In developed economies, however,
trade, but oppose international organizations, immigration
these developments can amplify status anxiety, thereby
and international rules that facilitate free trade but appear
providing both fodder for globalization-sceptical political
to constrain national sovereignty.
actors and more negative views about globalization.
Second, although political actors opposed to
All of this suggests that, rather than shaping the views
globalization have become more vocal and powerful,
and the debate about globalization directly, the effects
there is little evidence that the public overall has become
of inequality on people’s perceptions of globalization
significantly more sceptical about economic globalization
are conditioned by the economic, societal and political
(Walter, 2021). Rather, savvy political actors have given
context in which they play out.
globalization sceptics a much louder voice than they used
to have in the past, so that globalization-related issues
play a much more important role in domestic politics Disclaimer
today than twenty years ago. Today, political competition
Opinion pieces are the sole responsibility of their
is increasingly dominated by non-economic issues, such
authors. They do not necessarily reflect the opinions
as national sovereignty, the environment, or immigration,
or views of WTO members or the WTO Secretariat.
that do not line up neatly on the traditional left-right
political axis.

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TRADE AND INCLUSIVENESS:
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WITHIN ECONOMIES

which provide additional income temporarily to recognition, harmonization and transparency in sanitary
displaced workers who are re-employed at a lower and phytosanitary (SPS) measures and technical
wage, can be effective policies to shorten the regulations can help to reduce anti-competitive
transition to reemployment (Dix-Carneiro, 2014). The practices by lowering entry barriers for exporters,
analysis of a particular US wage insurance programme, fostering a level playing field and reducing the ability
designed for workers displaced by trade, shows that it of dominant firms to use regulatory differences to their
effectively reduced unemployment and increased the advantage (Fernandes, Lefebvre and Rocha, 2021).
cumulative earnings of eligible workers by subsidizing
earnings when the new job paid less than the previous 4. I nclusive trade is set to
one (Hyman, Kovak and Leive, 2024). Positive effects undergo transformation
on income and re-employment probabilities have also
been found for on-the-job training support, job search
amid emerging global trends
assistance and re-employment bonuses (WTO, 2017).
Trade is affected to a large extent by structural
Reforms of labour market institutions can macroeconomic trends. These trends shape the
shape the adjustment to trade shocks. Success overall economic environment in which trade occurs,
in facilitating economic adjustment involves finding including factors of production and the policy and
an appropriate balance between labour market regulatory framework. Looking ahead, there are three
flexibility and employment security. Reducing highly major developments that strongly affect both trade
restrictive dismissal costs in parallel to trade-opening flows and within-economy inequality, namely the digital
can facilitate the reallocation of workers and lead to revolution, climate change and increasing geopolitical
substantially higher welfare gains. For instance, high tensions. In affecting both trade and inequality, these
firing costs in a rigid labour market were shown to trends also change the nature and dynamics of
slow intersectoral worker reallocation by 30 per cent, inclusive trade, and how it interacts with inequality.
reducing gains in real output and labour productivity Digitalization can democratize international
following trade-opening (Kambourov, 2009; Co ar, trade by providing access and opportunities to
Guner and Tybout, 2016). more participants. Digital technologies can increase
Addressing excessive market power can access to information, markets and services for
contribute to a fairer distribution of the gains traditionally underrepresented groups in trade, such
from trade. In some economies, the increasing as women, young people, and MSMEs (Pergelova
dominance of a few large firms has been a major et al., 2019). Digital trade, in particular, has allowed
contributor to rising inequality (Autor et al., 2020). for direct business-to-consumer trade by MSMEs of
This has prompted discussions and reforms related to smaller, lower-value shipments, and digital platforms
competition policy, for instance with respect to large have created the connections and audience required
technology firms. In the context of international trade, for international transactions (IMF, 2023). Women
there are often noticeable market power asymmetries and young people also particularly benefit more from
between MNEs or intermediaries and small suppliers. digital trade, as they face fewer barriers compared to
For instance, in the coffee industry, large MNEs often physical transactions (World Bank and WTO, 2023b).
dominate the market, controlling prices and terms of For instance, more than 80 per cent of sellers in the
e-commerce marketplace Etsy are women, and are
trade. Small coffee farmers in developing economies
twice as likely to be young adults (IMF et al., 2023).
lack the market power and resources to negotiate
Digital industries, with their flexible locations, have
better terms, resulting in significant income disparities.
contributed to changes in within-country migration
“Fair trade” certifications can address market power
patterns, prompting some remote workers to relocate
asymmetries by enhancing the bargaining power of
from urban to rural areas, thereby distributing the gains
producers in developing economies through improved
from trade more widely (Bick et al., 2024).
access to markets, fair pricing practices, and social
premiums for community development (Dragusanu, Yet, a significant digital divide between and
Montero and Nunn, 2022). Fair trade certifications within economies remains, creating additional
have been found to boost farmer incomes by more burdens and reducing trade opportunities.
than 30 per cent (Zavala, 2023). Quality certification Although the share of the global population with
programmes can serve a similar purpose by reducing internet access and mobile coverage continues to
the difference between final consumer prices and increase, significant differences remain, especially
farmer incomes (Macchiavello and Miquel-Florensa, within developing economies, for example between
2019; Rifin and Nauly, 2020). Greater mutual urban and rural areas, between men and women, and

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between large and small firms (ITU, 2023b; OECD, (see Box C.5), access disparities in digital technologies
2021). In addition, digital services tend to cluster in could create challenges for equality and international
urban areas in which there are larger pools of highly trade participation, and AI-driven labour adjustments
skilled workers and established trade infrastructures; remain a potential concern. Ultimately, new digital
as a result, the benefits of digitalization are not accruing technologies will continue to emerge, and it is important
equally across regions (Nano and Stolzenburg, 2021; that all workers can use and access those technologies.
Springford, Tordoir and Resende Carvalho, 2024). As underscored in Section C.4, policymakers must
focus on digital access, especially internet service
Socio-cultural differences can further reduce
provision, as well as education and training, are
digital access for certain groups. For example,
essential to ensure that all segments of populations can
in many developing economies, women face greater
use new digital tools and services going forward.
digital exclusion (Rashid, 2016; ITU, 2023a). Further,
while women in certain developing economies have Climate change is expected to impact
mobile phones, they still lack smartphone access international trade negatively, and to exacerbate
relative to men, which holds them back in terms of the within-economy inequality. Climate change has
access to the latest digital technologies (Blanchard, adverse effects on health and on access to drinking
Gollin and Kirchberger, 2023). These differences have water, food and land, with significant trade-related
implications for within-country learning, health and impacts on agriculture, fishing and movements
economic resilience (Arisoy, 2022; Azzopardi-Muscat of people (Stern, 2007; WTO, 2022). Vulnerable
and Sørensen, 2019; Shah and Shah, 2023; WTO, groups, often residing in marginal areas with limited
2021b). The COVID-19 pandemic highlighted the recovery capacity, face higher risk from climate-related
critical role of equitable access to digital technologies hazards (Islam and Winkel, 2017). This exacerbates
in maintaining schooling, access to health resources, inequality, particularly affecting disadvantaged groups
and business operations. The pandemic changed and women, due to differing task allocations. For
perceptions of the internet, so that it is now considered example, due to societal norms in some areas, women
to be an essential public service, which underscores may be more likely to undertake tasks like retrieving
the need for equitable and expanded access (Greig water, gathering firewood and subsistence farming,
and Nelson, 2022). all of which are becoming more challenging due to
climate change. Disadvantaged groups are especially
An increasingly pressing issue for inequality vulnerable to market and price changes, given the
linked to digitalization is labour replacement volatility of food prices and the relatively higher share
and disruption by artificial intelligence (AI). of income they already spend on nutrition. Indigenous
AI can have a positive impact on labour productivity, peoples are also particularly vulnerable to climate
especially in smaller firms (Damioli, Van Roy and change and trade-linked environmental impacts, such
Vertesy, 2021), and it can facilitate trade through as deforestation, that threaten their access to land and
the automation of tasks, access to information, and natural resources (Abman and Lundberg, 2020; Jerez,
other capabilities that might otherwise require costly 2021; Renglet, 2022).
outsourcing (Garg, Mahajan and Ghosh, 2022).
However, while AI can support firm competitiveness The global shift towards renewable energy
and internationalization by increasing productivity sources and sustainable practices has reshaped
and reducing costs, it also threatens to render a trade dynamics. This transformation has not only
growing number of jobs obsolete, and this could spurred innovation and investment, but has also
impact inequality. Services jobs in which women are opened new avenues for cross-border collaboration
principally employed are potentially those most at risk and trade partnerships. For instance, sustainable
entrepreneurship has witnessed a significant surge
(Acemoglu, 2024). Various studies highlight the threat
in Europe, leading to the emergence of innovative
of AI to employment in certain positions (Kim, 2019;
green technologies and services that are increasingly
Mesquita, Oliveira and Sequeira, 2021), particularly
in demand around the world (Crecente, Sarabia and
in white-collar jobs, including coding, accounting and
Teresa Del Val, 2021). Similarly, climate change-induced
research (Molla, 2023; Talmage-Rostron, 2024), all of
challenges in regions like Nigeria have prompted the
which are digital services that are frequently traded by
creation of new businesses focused on mitigation and
smaller enterprises (Kerner and Kitsing, 2023).
adaptation activities, with potential for exportation
The future impact of digital trade on inclusiveness of green products and expertise (Akuwudike, Mac-
remains uncertain. Although digital trade offers Ozigbo and Igbokwe-Ibeto, 2020). This trend is not only
opportunities for development and inclusiveness fostering economic growth, but is also contributing to

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Box C.5: Microtech opportunities in developing economies

Short-term work by independent workers who use digital platforms to find employment, commonly referred
to as microtech and digital gig work, are transforming livelihoods in internet-connected developing areas,
offering new opportunities for young people, in particular, and potentially impacting migration patterns by
creating more local work (Onkokame, Schoentgen and Gillwald, 2018). In many African economies, for
instance, mobile internet-enabled devices and rural internet access points provide crucial connection to
the digital economy, enabling workers to participate in microwork (i.e., small tasks undertaken online which
contribute to a larger task or project) and earn income without leaving their communities.

The growth of AI has further driven demand for datasets created through microwork, providing new
employment avenues for digitally connected individuals. This trend is evident in economies like Namibia,
where digital microwork has become a viable livelihood strategy for those who face difficulties in accessing
formal or stable employment opportunities (Keskinen et al., 2022).

However, this emerging sector faces significant challenges, such as the necessity for access to international
payment systems. Local payment infrastructures are often fragmented and lack interoperability across
borders, making it difficult for workers to receive their earnings (Onkokame, Schoentgen and Gillwald,
2018). Societal norms and infrastructure limitations create ongoing challenges to digital access by different
demographic groups. This creates frictions and challenges to joining the digital labour market, leading to
particularly low levels of digital labour in Africa (Onkokame, Schoentgen and Gillwald, 2018; Mothobi, 2021).
Despite these issues, the potential for microwork to empower individuals in developing regions remains
substantial, provided that supportive infrastructures and policies are in place to address these hurdles
(Ngene, 2022).

While digital gig work offers flexibility and opportunities, it can also negatively impact the working conditions
of some by creating job insecurity and unstable income, as it typically involves project-based, short-term
contracts without long-term stability (ILO, 2021b). Gig workers often lack traditional employment benefits,
such as health insurance, paid leave and retirement plans, making them more vulnerable in times of need.
In addition, they may experience irregular work hours, which can affect their overall income and work-life
balance. These challenges highlight the importance of regulatory frameworks to protect gig workers’ rights.

resilience in communities vulnerable to the effects of Geopolitical tensions disrupt trade and
climate change. As the transition to greener economies undermine inclusiveness efforts. Fragmentation
intensifies, the entrepreneurial landscape will continue – i.e., the unwinding of trading relationships and
to evolve, offering diverse opportunities for sustainable the recourse to unilateral, rather than multilateral,
development and environmental stewardship. policies – presents a major risk to progress in
reducing poverty and inequality and particularly affects
International trade will play a pivotal role in
vulnerable groups, such as low-income households,
mitigating the impacts of climate change while women and MSMEs (WTO, 2023c). This reality
also addressing within-country inequality. has been exemplified by recent shocks, such as the
International trade will be needed to access resources COVID-19 pandemic and the ensuing price inflation,
following climate-related events, smooth cost spikes, and persistent conflicts in the world, which have
and support innovation by entrepreneurs through increased economic fragility. Disrupted infrastructure
knowledge transfers (WTO, 2021b; 2022). Initiatives and logistics, exclusion from international markets
like targeted investments in marginalized communities or services like payment systems, and interrupted
and capacity-building programmes can contribute to shipments or receipt of goods and services, are all
ensuring that the benefits of trade and climate action relatively more challenging for smaller enterprises
are more equitably distributed by enabling local and those with less resources. Some decoupling
businesses to participate in green supply chains. strategies, such as reshoring through greater
Removing trade barriers to climate-related goods automation, may also disrupt labour markets in some
and services can further improve access to the latest sectors. While technological advancement in robotics
mitigation tools and technologies (Ouwehand and and AI can facilitate the reshoring of some activities
Layton, 2021). (typically in high-income economies), it can also

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reduce the number of reshored jobs by making some While a large majority of individuals gain from
imported inputs and tasks (typically those undertaken trade, a small share of the population encounters
in developing economies) redundant and making negative income effects from import competition.
automation more cost-effective (WTO, 2023c). Even Trade can provide new opportunities for those who
outside of a specific geopolitical shock, the threat have been negatively affected by import competition,
of such disruption is especially detrimental to more but seizing these opportunities requires adjustment.
vulnerable populations, including some women, young Distortions and barriers can render that adjustment
people and the elderly (ITC, 2023). These challenges difficult and costly. As a result, domestic policy is
may be compounded by trade barriers arising from necessary to support adjustment and to remove
disrupted infrastructure, heightened corruption and domestic distortions and barriers, in order to make trade
severed business connections. Moreover, fragility more inclusive. As the digital revolution, geopolitical
disproportionately affects more unequal economies, tensions and climate change increasingly affect the
and the escalation of inequality itself exacerbates inclusiveness of trade, the importance of domestic
fragility. By 2030, it is projected that two-thirds of the policies to provide a level playing field domestically will
world’s extreme poor will reside in fragile or conflict- become ever more important.
impacted economies (Corral et al., 2020).
Domestic factors that prevent inclusiveness
Overall, the digital revolution provides many across economies also limit the inclusiveness of
opportunities for inclusive trade, but they also trade within economies. The effects of trade highlight
create challenges, which are aggravated by the fact that inclusiveness across and within economies
climate change and geopolitics. Overcoming the are closely linked, as they are driven by similar factors.
challenges to inclusive trade created by the digital From excessive market power to underdeveloped
divide, climate change and geopolitical uncertainty infrastructure, many underlying country-specific
reinforces one of the key messages of this chapter: factors are critical for trade to generate growth, and
domestic policies are key to making trade inclusive. for that growth to be inclusive. This emphasizes the
These include, for instance, broadening access to importance of the domestic policy environment in
digital infrastructure, providing financial support, which trade operates, and it sets up a clear policy
increasing access to credit for underserved agenda that can unlock the potential of trade to
populations, and promoting education and training. benefit all. At the same time, trade policies are not
Trade policy can play a role in maximizing the necessarily neutral in terms of distributional effects. It
opportunities of digitalization, for instance by is important that policymakers be aware of this and, to
improving market access through streamlined the extent possible, that they strive for trade policies
regulation and procedures. As discussed in Chapter that do not unnecessarily and unfairly disadvantage
D, international cooperation can help foster synergies any particular group.
for inclusiveness by aligning policies and resources to
Some of these domestic factors can only be
collectively address economic disparities and promote
addressed through international cooperation.
equal access to global trade benefits.
International trade cooperation is essential to
address the challenges to accessing export
5. Conclusions markets encountered by domestic MSMEs and
women-owned businesses. Similarly, coordinated
In the right policy environment, trade can deliver
competition policy responses may be needed to
aggregate welfare gains and poverty reduction,
address global market concentration by some MNEs.
and can support inclusiveness without
Connecting rural areas to larger markets may also
necessarily raising inequality. This, indeed, has
require market access to neighbouring economies.
occurred in many economies, which aligns with recent
Efforts to collect disaggregated data (e.g., firm-level,
studies showing that trade is not systematically linked
gender, employment or household data) at national
with inequality. Rather, it is country-specific factors,
and international levels can enhance the ability to
such as which sectors exhibit comparative advantage,
evaluate the impact of policies on different groups
that have a greater influence on determining who
of the population, and to monitor and adjust them
benefits from trade and who faces losses from
accordingly. Chapter D discusses the critical role of
increased competition. Thus, trade may either increase
international cooperation in more detail.
or decrease inequality.

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TRADE AND INCLUSIVENESS:
HOW TO MAKE TRADE WORK FOR ALL C TRADE AND INCLUSIVENESS
WITHIN ECONOMIES

Endnotes
1 See https://wid.world/. 4 Under so-called “de minimis” rules, imports may enter an economy
duty-free if their value remains below a certain threshold. In the
2 This general trend holds also for other inequality measures, such United States, this threshold is equal to US$ 800.
as the share of top 1 per cent of income earners in total income,
or the share of the bottom 50 per cent. Estimates using alternative 5 See https://www.enterprisesurveys.org/en/enterprisesurveys.
data sources obtain similar results (Pinkovskiy et al., 2024). Post-
tax inequality has declined even faster, although the difference is 6 See https://wid.world/.
marginal. 7 A collaboration of Facebook (now Meta), the Organisation for
3 Using highly disaggregated data on both consumption and Economic Co-operation and Development (OECD) and the World
employment patterns in the United States and simulating a 10 per Bank, available at https://web-archive.oecd.org/temp/2023-02-
cent fall in trade costs, Borusyak and Jaravel (2024) find that all 13/476400-the-future-of-business-survey.htm.
income deciles benefit on average, and that the gains are slightly 8 See https://www.lisdatacenter.org/.
higher for poorer households, ranging from 2.0 per cent in the
bottom decile to 1.8 per cent for the top decile. However, over 9 See WTO (2017) and Grundke and Arnold (2022) for more
99 per cent of the variance of welfare changes from trade shocks comprehensive discussions.
arises within, rather than across, income deciles.

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D
Inclusive trade and
international cooperation
This chapter discusses how the multilateral trading
system has helped some economies to take advantage
of trade to further their development, but has not
succeeded in helping others to harness trade for growth
and considers what could be done to ensure that
the WTO leaves no economy behind. It also examines
the effect of the WTO on how the benefits of trade are
shared out within economies, and discusses how
the WTO and trade can be made more inclusive for
people and firms. Finally, the chapter outlines the
areas in which work at the WTO could be coordinated
with work at other international organizations to help
make trade more inclusive, such as by enhancing
infrastructure and digital connectivity to bridge
the digital gap or by ensuring coherence between
trade and environmental policies.

Contents
1. Ensuring that the WTO leaves no economy behind 98

2. Making the WTO and trade more inclusive for people and firms 118

3. Promoting inclusive development through enhanced international cooperation 124

4. C onclusions 135

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Key points

• The WTO’s rules-based trading system supports all economies,

especially the less powerful, by promoting non-discrimination
between trading partners. To promote development, WTO rules
also provide flexibilities to developing members and least-developed
countries (LDCs) to help them to implement the WTO agreements
and benefit from trade.

• More can be done for economies that have not yet derived all
the benefits from trade. Further commitments in key areas, such as
digital and services trade, could help improve their integration and
income convergence. However, implementing special and differential
treatment provisions in WTO agreements should be made more
effective so that developing economies and LDCs can benefit more
fully from trade.

• To develop a more inclusive economy, policies are required to

reduce the obstacles currently preventing marginalized regions
and groups, such as low-income households and micro, small and
medium-sized enterprises (MSMEs), from participating fully in and
benefitting from global markets. Domestic policies are also needed
to lower the costs of adjusting to trade or technology shocks.
At the international level, more active monitoring and more
exchanges of information and best practices learning could help
to make national policies more effective.

• Because different international organizations deal with

complementary policies that could enable trade to better support
development and inclusiveness – such as competition policy or
infrastructure development to help make digital trade more
inclusive – broadening and strengthening international cooperation
could make these complementary policies more effective.

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1. Ensuring that the WTO leaves without facing retaliation from its trading partners
(Maggi and Rodríguez-Clare, 1998). Commitments in
no economy behind international agreements act as an “external anchor”
or “signalling device”, ensuring that trade reforms are
(a) T
 he WTO has contributed to convergence,
enduring.
but participation in the WTO has been uneven
Evidence discussed in this section shows that Non-discrimination provisions in the WTO
agreements aim to foster the development
the WTO has helped reduce trade barriers and
of all members, leveraging their comparative
increase the predictability of trade policy,
advantages, through a trading system based on
boosting trade flows and reducing their
“equality of opportunities”. Non-discrimination
volatility. It also shows that the WTO has contributed
provisions establish legal conditions for “equal” or
to convergence by fostering reforms and good
“no less favourable” treatment between exporting
governance. While there are several arguments in
economies and between domestic and imported goods
support of specific flexibilities for developing countries,
and services. They do not aim to eliminate competition,
there is little evidence on the use and effects of such
but to ensure that it is based on the intrinsic aspects of
flexibilities. Available information, however, indicates
goods and services, such as price or quality.
that participation of low-income economies in the
WTO has been limited. Economies benefit from joining the WTO through
several channels. First, the WTO contributes to
(i) W
 TO membership and commitments have
reducing trade barriers, which promotes trade-led
contributed to trade and economic growth
growth. Second, WTO membership increases the
Being a member of the WTO involves making predictability of trade policies, which fosters more
commitments on trade-related policies that can stable trade flows. Third, the WTO agreements
help to avoid mutually damaging “beggar-thy- support trade reforms and efforts to improve domestic
neighbour” policies. Without international trade governance. This enhances economic performance
agreements, large economies might be tempted to and global integration for all members collectively.
raise tariffs unilaterally, reducing the price of their Beyond those pecuniary benefits, the WTO also gives
imports at the expense of their trading partners. Such all its members a voice at the negotiating table. It helps
actions could prompt trading partners to retaliate,
and could lead to a trade war that harms all involved
Figure D.1: Contribution of multilateral and
(Bagwell and Staiger, 1999; 2006; Broda, Limão and
unilateral reductions to the global average
Weinstein, 2008). In the absence of international
MFN tariff rate, 1996-2023
cooperation, a large economy could also impose a
unilateral tariff to shift profits towards its domestic 12.5%
firms at the expense of foreign ones (Ossa, 2011,
12%
2012). Thus, international trade agreements, such 3 p.p.
as those overseen by the WTO, can prevent large 10%
economies from setting their tariffs so as to increase 1 p.p. 8.5%

their terms of trade (i.e., the export price to import 8%

Average tariff rate

price ratio), and from gaining economic benefits at the

6%
expense of their trading partners.1

Strong commitments in international trade 4%

agreements, including those overseen by the

2%
WTO, enhance the credibility of trade policy
reform programmes and help lock them in.
0%
Without this credibility, governments may struggle 1996 2023
to open up to trade due to potential objections from Unilateral tariff reduction with respect to 1996
domestic interest groups. According to the economic Multilateral tariff reduction with respect to 1996 Applied MFN tariff rate

theory of trade agreements, by participating in an

international trade agreement, a government can Source: Authors’ calculations, based on WTO data on applied
MFN and bound tariff rates.
credibly announce its intention to open up to trade, Note: The figure displays the decomposition of the reduction
while signalling to domestic producers that it cannot in the average applied MFN tariff rate between multilateral and
unilateral reductions expressed in percentage points (p.p.).
subsequently back down from those commitments

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TRADE AND INCLUSIVENESS:
HOW TO MAKE TRADE WORK FOR ALL D INCLUSIVE TRADE AND
INTERNATIONAL COOPERATION

to level the playing field and it promotes the rule of law show that the WTO promotes trade among members
through a binding dispute settlement system system. effectively, with a particularly strong impact on
developing economies. The positive effects of WTO
The WTO has helped to reduce trade barriers
membership on trade increase over time, up to the 10th
and foster trade growth. While unilateral action
year after accession (see Figure D.2), highlighting the
and regional agreements have largely contributed to
long-term benefits of WTO membership in fostering
dismantling trade barriers and promoting trade, the role
trade integration.
of multilateral integration cannot be understated. As
discussed in Chapter B, trade-opening has enhanced The WTO has increased the predictability
productivity and enabled income convergence across of trade policy, boosting trade flows and
economies. Since the creation of the WTO, global reducing their volatility. By lowering trade policy
average applied most-favoured-nation (MFN) tariffs uncertainty, it positively impacts exports, consumer
have decreased by 4 percentage points, with one price affordability and supply chain integration. The
percentage point of this reduction directly attributed increased transparency fostered by the WTO, such
to multilateral integration (see Figure D.1). Part of the as by means of precise tariff schedules, significantly
multilateral tariff reduction has come from economies decreases export volatility and boosts trade (Mansfield
that joined the WTO after its establishment in 1995. and Reinhardt, 2008). Predictable trading rules further
For example, the average tariff rate of China, which reduce trade volatility and facilitate global value chain
became a WTO member in 2001, dropped from participation (Handley and Limão, 2022). For example,
21.4 to 7.9 per cent due to China’s commitment upon research finds that China’s WTO accession, through
joining the WTO to bind all tariffs below their prior which China obtained MFN status, accounted for over
rates (Ianchovichina and Martin, 2001). Alongside one third of China’s export growth to the United States
multilateral tariff reductions, the rise in regional trade between 2000 and 2005 (Handley and Limão, 2017).
agreements (RTAs) has significantly lowered tariffs, This reduction in trade policy uncertainty lowered US
bringing average effectively applied rates down to prices and increased consumer incomes to the same
extent as a 13-percentage-point permanent tariff
2 per cent.
reduction. The multilateral aspect of the WTO, unlike
Membership of the General Agreement on an RTA, reduces trade volatility not only among direct
Tariffs and Trade (GATT)/WTO has, on average, trading partners, but also across multiple trading
boosted trade between members by 140 per partners through spillover effects (Chowdhury et al.,
cent. International trade agreements aim to support 2021). WTO commitments also reduce protectionist
economic growth by reducing trade barriers and reactions to import shocks, thereby lowering trade
promoting international trade. Larch et al. (2024) policy uncertainty (Jakubik and Piermartini, 2023).

Figure D.2: Lasting positive impact of GATT/WTO membership on trade

1.8

1.6
Estimates of impact of GATT/WTO
membership on bilateral trade

1.4

1.2

0.8

0.6

0.4

0.2

0
-5 -4 -3 -2 -1 0 1 2 3 4 5 6 7 8 9 10
Years prior to and following GATT/WTO accession

Source: Larch et al. (2024).

Note: The figure depicts the evolution of the average bilateral trade effects of GATT/WTO membership before and after joining the GATT/WTO.
The annual bilateral trade effects were estimated using a structural gravity model. The shaded area represents the 95 per cent confidence
interval. Time 0 refers to the year of joining the GATT/WTO.

- 99 -
Lower trade policy uncertainty has also played mitigating the impact of negative foreign supply shocks
an important role in facilitating imports. Firms on economic growth (WTO, 2021b).
are more willing to pay the fixed costs of importing
Low- and lower middle-income economies tend
new inputs when the risk that future trade barriers will
to have higher tariff flexibilities, on average,
raise input prices is low. Easier adoption of new inputs
but also greater tariff uncertainty. In multilateral
can enhance the efficiency and profitability of firms by
trade negotiations on market access, least-developed
promoting the use of complementary inputs. Empirical
countries (LDCs) typically benefit from exceptions to
estimates suggest that China’s WTO accession,
the reciprocity principle (i.e., the need to offer tariff
by reducing uncertainty, significantly contributed to
concessions equivalent to those they receive), which
Chinese import growth, to an even greater degree allows them to avoid lowering their tariffs or to reduce
than the tariff reduction associated with the accession. them less than other economies. As a result, least-
Additional post-WTO tariff reductions have further developed WTO members, in particular those that have
increased imports, as low trade policy uncertainty not joined the WTO through the accessions process,
reduces importers’ concerns about a possible increase have significantly fewer bound tariff lines (i.e., tariff
in future trade protectionism (Handley et al., 2024). lines for which they have committed not to apply a duty
WTO commitments help to diversify both exceeding a certain maximum rate). Graduated LDCs,
exports and imports. Thanks to the commitments including those proposed for graduation in 2026, tend
to have, on average, higher binding coverages, which
made by economies during their WTO accession
can be attributed to their WTO accession process.
process, WTO membership enables economies to
The bound tariff rates of LDCs are, on average, higher
diversify their buyers, stabilizing export growth. WTO
than those of other WTO members. In parallel, the gap
accession has been found to increase the number of
(also called “water”) between LDCs’ bound and applied
products traded because it facilitates the formation of
tariffs is also larger than that of other members (see
new trading partnerships (Dutt, Mihov and Van Zandt,
Figure D.3).
2013). WTO commitments also improve domestic
producers’ access to imported intermediate inputs by Low- and lower middle-income economies tend
reducing reliance on only a few economies, thereby to use tariff flexibilities to raise their applied

Figure D.3: Low tariff binding coverage and high bound tariffs and tariff gap in lower-income
economies, 2022
100%
92% 92% 91%
90% 88%

80%

70%

60%
56%
53%
50%
46%
43%
40% 39%
33% 34%
30%
30%
23%
20%
15%
10%
10%

0%
Average binding coverage Average bound rate Average tariff gap
Non-graduated LDCs Graduated LDCs Lower-middle-income economies Upper-middle-income economies High-income economies

Source: Authors’ calculations, based on WTO data on bound and applied MFN tariff rates.
Note: The figure displays the average binding coverage, average bound rates and tariff gap by income group. The binding coverage is the share
of tariff lines at the six-digit level of the Harmonized System (HS) that are bounded. The tariff gap is the average difference in percentage points
between the bound tariff rate and the applied MFN tariff rate at the six-digit level. The income groups are based on the 2022 World Bank’s
classification. The LDC group is based on the United Nations (UN) classification. Graduated LDCs include those that have graduated from LDC
status and those proposed for graduation in 2026.

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TRADE AND INCLUSIVENESS:
HOW TO MAKE TRADE WORK FOR ALL D INCLUSIVE TRADE AND
INTERNATIONAL COOPERATION

MFN tariffs more extensively. Low-income contracting parties to the GATT – which preceded
economies have raised their tariffs by 15 per cent the WTO – were not systematically required to make
or more on a higher share of tariff lines than other substantial commitments and they automatically
economies between 1995 and 2023 (see Figure D.4). became WTO members. 2 Economies that were not
While this trend reflects the trade policy flexibility GATT contracting parties, however, must, when
provided by the WTO, it also points to greater tariff seeking to join the WTO under Article XII of the
policy uncertainty, all things being equal. Marrakesh Agreement Establishing the World Trade
Organization (Marrakesh Agreement), make significant
The WTO has contributed to convergence by
commitments, including structural reforms. Developing
fostering reforms and good governance. When
countries that acceded to the WTO after 1995
acceding to the WTO, economies commit to wide-
under Article XII have outperformed original WTO
ranging reforms in trade policy, economic institutions
members in investment and GDP growth (see Figure
and domestic governance. These include reducing
D.5). This suggests that commitments are important
tariffs and non-tariff measures (NTMs), regulating
for developing economies’ economic convergence.
state-owned enterprises, protecting intellectual
WTO econometric analysis suggests that economies
property (IP) rights, establishing independent tribunals
undergoing rigorous accession negotiations grew 1.5
and ensuring uniform treaty application (Scalera, 2017).
percentage points faster during the accession period
Such commitments can lead to meaningful changes
than they would have otherwise and continue to grow
in domestic institutions and economic outcomes.
faster after accession (Brotto et al., 2024).
Governance metrics closely linked to those covered
by WTO commitments, such as non-discrimination, (ii) L
 DCs seem to have benefited
transparency, and administrative due processes, disproportionately from the TFA, but they
have been shown to improve as a result of accession have not yet realized the full potential of
(Aaronson and Abouharb, 2014). Furthermore, the the TRIPS Agreement
growth and investment boost that results from WTO
The Trade Facilitation Agreement (TFA) has
accession tends to be stronger in economies with
boosted trade and contributed to economic
weaker institutions, as they benefit more from possible
convergence. The TFA, which aims to simplify,
“policy anchoring” (Tang and Wei, 2009).
modernize and harmonize export and import
The economic growth effect of WTO accession processes, came into force in 2017. It includes
depends on the extent of WTO commitments. provisions for speeding up the movement, release
Economies that have made more commitments and clearance of goods, including those in transit. It
outperformed those that did not (Tang and Wei, also promotes effective cooperation between customs
2009; Brotto, Jakubik and Piermartini, 2021). New and other relevant authorities on trade facilitation and

Figure D.4: Higher cumulative share of peaked tariff lines in lower-income economies, 1995-2023
8%
Cumulative average share of increased
tariff lines by 15 or higher percentage

7%

6%
points in total tariff lines

5%

4%

3%

2%

1%

0%
96

97

98

99

00

01

02

03

04

05

06

08

09

10

11

12

13

14

15

16

17

18

19

20

21

22

23
07
19

19

19

19

20

20

20

20

20

20

20

20

20

20

20

20

20

20

20

20

20

20

20

20

20

20

20

20

Non-graduated LDCs Graduated LDCs Lower-middle-income economies Upper-middle-income economies High-income economies

Source: Authors’ calculations, based on WTO data on applied MFN tariff data.
Note: The figure displays the cumulative average share of the number of tariff lines increased by 15 percentage point or higher in the total
number of tariff lines at the eight- or ten-digit level by income group. The income groups are based on the 2022 World Bank’s classification. The
LDC group is based on the United Nations (UN) classification. Graduated LDCs include those that have graduated from LDC status and those
proposed for graduation in 2026.

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 Figure D.5: Higher economic growth and capital investment in WTO members with more extensive
commitments

80% 250%

Average change in capital imvesrment share

Average change in GDP per capita
relative to GATT/WTO entry year

relative to GATT/WTO entry year

200%
60%

150%
40%
100%
20%
50%

0%
0%

-20% -50%
-5 -4 -3 -2 -1 0 1 2 3 4 5 6 7 8 9 10 -5 -4 -3 -2 -1 0 1 2 3 4 5 6 7 8 9 10
Years prior to and following GATT/WTO accession Years prior to and following GATT/WTO accession

Article XII members Non-Article XII members

Source: Authors’ calculations, based on Penn World Table data and Brotto et al. (2024).
Note: The figure shows the average change in GDP per capita and the capital investment share in relation to the year of GATT/WTO entry for
both Article XII WTO members and non-Article XII members. GDP per capita growth is based on expenditure-side real GDP expressed in 2017
US$ purchasing power parity. Investment rate is the share of gross fixed capital formation in GDP. Article XII members refers to members that
acceded the WTO after 1995 under Article XII of the GATT. Non-Article XII refers to GATT contracting members that became WTO members
without having to go through the Article XII process.

customs compliance issues, and contains provisions their domestic systems. LDCs, however, benefit from
for technical assistance and capacity-building. The a longer transition period in implementing the TRIPS
implementation of the TFA has led to a substantial Agreement. Originally, they were given 11 years to
increase in trade, with agricultural trade among implement the TRIPS Agreement. This transition period
developing economies increasing by 16 to 22 per cent was extended three times (in 2005, 2013 and 2021)
(Beverelli et al., 2023). Manufacturing trade has also and is currently valid until 1 July 2034. While there
risen, although the impact of the TFA on manufacturing is strong empirical evidence that WTO membership
trade has been more limited. Overall, the TFA has boosts economic growth in developing economies,
led to a global merchandise trade increase of including LDCs, the impact of the TRIPS Agreement’s
1.17 per cent and a real income rise of 0.12 per cent. provisions on patent law on low-income economies is
The most substantial real income gains have been less clear, bearing in mind that the transition period for
found to benefit LDCs disproportionally, with export LDCs has been extended and that they are not obliged
increases estimated at 2.4 per cent, further contributing under TRIPS to protect patents, and that many low-
to economic convergence. Yet, as discussed in Chapter income economies have negligible numbers of, or no,
B, low-income and lower-middle-income economies patents in force. Patent reforms have been found to
have made limited progress in implementing trade stimulate inward technology transfer through market-
facilitation measures, underscoring the need for further based channels, raise imports of high-technology
improvement. goods, and potentially stimulate export growth in large
Low-income economies may not have derived and in middle-income economies (Branstetter, Fisman
much benefit from the TRIPS Agreement and Foley, 2006; Delgado and Kyle, 2022). However,
because of challenges with its implementation. empirical evidence on the positive effects of patent
The WTO Agreement on Trade-Related Aspects of reforms on inward technology transfer in the poorest
Intellectual Property Rights (TRIPS Agreement) sets and smallest developing economies is limited. 3 This
minimum standards for IP protection and enforcement. is because low-income economies often lack the
These common minimum standards across members absorptive capacity and complementary infrastructure
aim to reduce trade barriers, create a predictable needed to benefit from enhanced IP regimes
trading environment and encourage cross-border IP (Branstetter and Maskus, 2022). Stronger IP laws may
transactions, including the innumerable IP licences not, therefore, lead to significant increases in innovation
that constitute the bulk of trade in digital goods. WTO or technology transfer in this context, as local firms may
members are required to implement these standards in struggle to adapt to the new competitive environment.

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INTERNATIONAL COOPERATION

(iii) E
 vidence on the use and effects of WTO technological sophistication (its proximity to the
flexibilities is limited “technology frontier”). Economies that are relatively
technologically sophisticated focus on research
While WTO membership involves a certain level of
and development (R&D) and efficient public-private
commitments, it also offers various flexibilities,
some of which are only available to developing research collaborations, while less technologically
economies, including LDCs. Certain flexibilities sophisticated economies may attempt to advance by
are available to all WTO members, such as safeguard absorbing technology from other economies through
measures to respond to surges in imports or the option trade, foreign direct investment (FDI) and direct
to introduce temporary trade barriers during balance- technology transfers. Second, low-income economies
of-payments crises (WTO, 2009). Other flexibilities tend to specialize in low value-added products with
are more particularly intended to take into account limited technological progress and spillovers into
the specific needs of low-income economies. WTO other sectors. Low levels of export sophistication
flexibilities specifically targeted at LDCs or developing adversely affect economic growth (Hidalgo et al.,
economies fall under special and differential treatment 2007; Hausmann, Hwang and Rodrik, 2007; Lin and
(S&DT) (see Box D.1).4 Currently, there are over Chang, 2009). Low-income economies also have
155 S&DT provisions across WTO agreements, limited diversification, making them more vulnerable
including 25 specifically designed for LDCs. to economic shocks (WTO, 2021b). Policies to
diversify economies are essential to provide a more
There are six different types of S&DT provisions.
stable development path. Third, the extent of market
A first type of S&DT provisions aims to increase the
failures requiring policy intervention varies according
trade opportunities of developing countries. The
to the income level of an economy. Market failures
Enabling Clause (see Box D.1), for example, aims to
are particularly prevalent in developing economies
achieve a rapid and sustained expansion of the export
due to factors such as imperfect information, a lack
earnings of developing economies. A second type of
of competition and inadequate regulatory frameworks
S&DT provisions aims to safeguard trade interests.
(Atkin et al., 2022). For example, capital market
Article 10.1 of the Agreement on the Application
imperfections, which limit the growth of high-potential
of Sanitary and Phytosanitary Measures (SPS
sectors and knowledge spillovers, can be more severe
Agreement), for example, requests that WTO members
in developing economies. Labour market failures can
take account of the special needs of developing
be more severe in low-income economies with large
members, including LDCs, in the preparation and
informal sectors. Fourth, exporting firms in low-income
application of SPS measures. A third type of S&DT
economies struggle to comply with trade-related
provisions offers flexibility in commitments. Article 27.2
policies. Compliance costs with these regulations
of the Agreement on Subsidies and Countervailing
Measures (SCM), for instance, exempts LDCs and tend to be fixed and may require high-skilled
developing economies with a per capita income not expertise. Policies that reduce compliance burdens,
exceeding US$ 1,000 from the prohibition to use such as longer transition periods and technical and
export subsidies. A fourth type of S&DT provisions financial assistance, can help firms in developing
aims to provide longer transition periods for developing economies meet higher standards and enhance their
economies and LDCs to adjust to certain WTO rules. competitiveness.
Most of the transition periods that had previously been While flexibilities are important for addressing
established have expired. Among the few that are still specific development concerns, some of them,
valid are those under the TFA and under Article 66.1 depending on their design, could undermine
of the TRIPS Agreement. A fifth type of S&DT provision
the predictability and value of commitments.
aims to ensure that technical assistance is provided
Flexibilities can create uncertainty about the application
to developing economies either bilaterally or by an
of trade agreements, making future trade conditions
appropriate international organization – for example,
less predictable. Temporary flexibilities can end up
as per Article 9 of the SPS Agreement. Finally, a sixth
becoming permanent, and differing interpretations
category of S&DT provision includes LDC-specific
can lead to inconsistencies or disputes. Flexibilities
provisions, such as in Article 66.2 of the TRIPS
can also erode the value of commitments for creating
Agreement (see Box D.2).
stable and predictable trading conditions by eroding
Several economic arguments support offering trust and hindering long-term cooperation. Frequent
flexibilities to developing economies. First, use of flexibilities can make commitments seem
the best policies for advancing technological unreliable, and can deter investment, if commitments
development depend on an economy’s level of are perceived to be easily altered. The challenge lies

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Box D.1: Development considerations have progressively been integrated into the GATT and WTO

Originally, the GATT was designed as a set of “equal opportunities” or “neutral” provisions, which aimed
to apply uniform rules to all contracting parties. “Development”, as the term is understood today, was not
clearly identified as a GATT priority in 1948, although 12 out of the 28 original GATT contracting parties still
consider themselves to be developing economies. Development considerations were, however, progressively
incorporated into the GATT framework.

In 1958, Article XVIII of the GATT (“Governmental Assistance to Economic Development”) was revised
to allow developing economies to support particular industries under certain conditions. As a number
of overseas territories of GATT contracting parties gained their independence, Part IV – “Trade and
Development” – was added to the GATT in 1966. The aim of GATT Part IV was to improve price stability
and market access to primary products crucial for developing economies, and to support diversification
by enhancing market access conditions for developing economies’ processed or manufactured products
exports. Part IV became fully effective in 1971 with the adoption of a system allowing developed economies
to offer non-discriminatory and non-reciprocal preferential tariff treatment for products from developing
economies. This was extended in 1979 by means of the “Enabling Clause” – officially called the “Decision on
Differential and More Favourable Treatment, Reciprocity and Fuller Participation of Developing Countries” –
which allows developed economies to maintain preferential trading schemes, provides for further preferential
access for LDCs, and allows developing economies to conclude RTAs with less stringent requirements.

Building on the GATT, the WTO framework, established in 1995, has taken different forms of development
considerations into account over the years. For example, the preamble of the Marrakesh Agreement recalls
the importance of supporting developing economies, in particular LDCs, in securing “a share in the growth
in international trade commensurate with the needs of their economic development”.

Other WTO agreements and decisions have also established various S&DT provisions to allow developing
economies, including LDCs, to benefit from more favourable and flexible treatment. In 2001, the Doha
Ministerial Declaration mandated a review to strengthen and enhance the effectiveness of all S&DT
provisions, resulting in various proposals.

In the early stages of the negotiations, 88 agreement-specific proposals were submitted in the Special
Session of the Committee on Trade Development by developing members, including LDCs. The monitoring
mechanism for S&DT provisions was adopted in 2013, but has seen limited use by WTO members. In
the decade leading up to the 13th WTO Ministerial Conference, which took place in early 2024, S&DT
negotiations were at an impasse. In 2015, the coalition of the G-90, which comprises the African Group,
the LDC Group and the African, Caribbean and Pacific (ACP) Group of States, submitted a shortened list
of 25 agreement-specific proposals, none of which was adopted at the 10 th WTO Ministerial Conference
in Nairobi. In 2017, the G-90 submitted a list of 10 agreement-specific proposals aimed at industrialization,
structural transformation, and economic diversification, but no progress was made at the 11th WTO
Ministerial Conference in Buenos Aires. Following the 12 th WTO Ministerial Conference, discussions on
S&DT have been guided by the renewed ministerial mandate under paragraph 2 of the 12 th WTO Ministerial
Conference outcome document. In 2023, the G-90 proposed various measures, including one related to
sanitary and phytosanitary (SPS) and technical barriers to trade (TBT) measures, and this proposal gained
traction leading up to the 13 th WTO Ministerial Conference.

At the 13 th Ministerial Conference in 2024, WTO members recognized that, with the necessary support,
developing economy members, including LDCs could remain committed to integrating WTO rules.
A ministerial declaration was adopted on the precise, effective and operational implementation of S&DT
provisions of the SPS and TBT Agreements. The 13 th WTO Ministerial Conference Ministerial Declaration
on S&DT is the first outcome ever made on agreement-specific proposals applicable to all developing
economies since the launch of the S&DT negotiations in 2001.

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Box D.2: WTO measures to increase the integration of LDCs into global trade

Over the years, WTO members have taken important steps to increase the integration of LDCs into global
trade. They have offered market access opportunities and flexibilities to implement WTO rules, and have
given LDCs priority when delivering technical assistance.

In the area of market access, significant progress has been made in providing duty-free quota-free market
access for LDC products since the adoption of the Ministerial Decisions on Duty-Free Quota-Free Market
Access for LDCs at the Hong Kong Ministerial Conference in 2005 and at the Bali Ministerial Conference
in 2013. Members have also taken several steps to ensure simple and transparent rules of origin for LDC
products. Two sets of guidelines were adopted to contribute to facilitating market access for LDC products.
In addition, most of the preference-granting members notified their preferential rules of origin using a new
template. In the 12th Ministerial Conference outcome document, WTO members recognized the need to
continue work on trade preferences and on identifying best practices in preferential rules of origin.

Efforts have also been made to boost the participation of LDCs in services trade. The LDC services waiver,
adopted in 2011 and currently valid until 2030, enables the provision of preferential treatment for LDC
services and services suppliers in terms of market access and other measures. Currently 25 members have
notified measures under the LDC services waiver, covering various sectors, including business services,
transport, tourism and travel. However, the lack of data prevents a comprehensive assessment of whether
these measures have resulted in economic opportunities for LDCs. Increased efforts are needed to track
LDC services export data and to support LDCs in building capacity in services trade.

LDCs also enjoy policy flexibilities in implementing WTO rules, including a transition period to implement the
TRIPS Agreement, which currently runs until 1 July 2034. LDCs are also eligible for benefits under Article
66.2 of the TRIPS Agreement, which calls on developed members to provide incentives to enterprises to
promote technology transfer. Since 2003, developed members have been providing annual reports on this
matter and the WTO Secretariat has been organizing annual workshops to discuss technology transfer to
LDCs.

WTO members have taken steps to support LDC accessions. They adopted two sets of guidelines, in 2002
and 2012, which call upon WTO members to exercise restraint in seeking market access from acceding
LDCs and set specific benchmarks regarding market access negotiations for goods and services.

In terms of technical assistance, LDCs remain a priority for the delivery of trade-related technical assistance
by the WTO. They are the second largest recipient of Aid for Trade, for a total amount of US$ 14 billion,
representing 28 per cent of total Aid for Trade disbursements in 2022. LDCs also benefit from the support of
the Enhanced Integrated Framework (EIF), which has disbursed over US$ 334 million to provide evidence-
based analysis, strengthen trade institutions and bolster key sectors with high export potential in LDCs.

In recent years, LDC graduation – i.e., graduation of these economies from LDC status – has become a main
priority of the LDC Group at the WTO. LDCs have been asking WTO members to support them in a smooth
transition by extending LDC-specific market access and S&DT for additional time after their graduation from
LDC status. Since then, WTO members have adopted two decisions to contribute to a better integration
of LDC graduates into global trade. First, members agreed to provide a smooth and sustainable transition
period before they withdraw duty-free and quota-free market access after graduation. Second, at the
13 th WTO Ministerial Conference, members offered LDC graduates three additional years during which they
can adjust to WTO rules and disciplines and continue to access LDC-specific technical assistance.

in finding a balance that maintains the overall integrity so-called “latecomer’s problem” refers to a situation
of the trade agreement while allowing for necessary in which developing economies face a significant
adjustments. imbalance in market access commitments compared
Economic theory also draws attention to certain to high-income economies. As discussed above,
drawbacks of S&DT provisions. For example, S&DT developing economies have, on average, higher bound
provisions can undermine future tariff negotiations. The and applied MFN tariffs than developed economies.

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This disparity arose as a result of decades of tariff been found to increase trade opportunities. However,
negotiations among advanced economies, in which while all of this suggests that S&DT provisions can
exemptions to the reciprocity principle allowed contribute to economic convergence, there is a lack of
developing economies to opt out from reciprocal tariff specific economic impact analysis of these provisions.
reductions. In that context, future tariff negotiations
WTO members’ views on S&DT differ. Some
may be challenging, given that developing economies
developed economies have questioned whether
would be expected to make relatively large tariff
developing economies have not been granted too many
reductions, while developed economies would have
exemptions and have advocated for reducing the scope
fewer tariff reductions to offer in return (Bagwell and
of S&DT provisions in current and future negotiations
Staiger, 2014). Anecdotal and empirical evidence
(Hoda, 2021). In addition, some developed economies
suggest that developing economies that have made have expressed concerns regarding self-determination
fewer commitments have benefited less from their WTO of development status within the WTO (Hoda, 2021;
membership. Ukpe and Khorana, 2021). In response, a number
While various WTO agreements include S&DT of developing economies have argued that the self-
provisions, several factors seem to hinder their declaration of development status is a long-standing
effective use. Several developing economies and practice and that, despite significant economic progress
LDCs have pointed to difficulties in implementing among many developing members, the standards of
certain S&DT provisions, on the basis that the living in these economies still significantly lag behind
vagueness of S&DT provisions and the complexity those of developed economies. One of the key points
of discussion involves weighing the implementation of
of their reporting and review mechanisms are not
horizontal S&DT provisions applicable to all developing
conducive to efficiency and legal certainty.
members against the identification of specific
Evidence on the use of S&DT provisions by challenges with a view to exploring targeted solutions.
developing economies and LDCs is limited,
(iv) A id for Trade and technical assistance
including because of capacity-related issues.
enhance export opportunities
More evidence is therefore needed. Members are
required to notify the WTO when they use specific S&DT Aid for Trade and similar technical assistance
provisions, but the number of S&DT-related notifications initiatives help firms in developing economies,
remains limited.5 It is unclear whether this indicates that especially LDCs, to meet international standards
few S&DT provisions have actually been invoked, or and access global markets. Since 2006, the
that they have been used without being notified. With WTO-led Aid for Trade initiative has contributed
several developing economies registering impressive US$ 648 billion to strengthen the export potential
increases in their share of global merchandise trade, of developing economies and LDCs and help them
the accurate tracking of the use of S&DT provisions has build the trade capacity and infrastructure they need
become even more difficult. Improving transparency to increase their participation in international trade.
in the use of S&DT provisions is important, but it may Developing economies view the Aid for Trade initiative
require technical assistance support. as supporting the economic growth objectives found
in their development strategies, including achieving a
While there is some evidence of the effectiveness higher income group status (OECD and WTO, 2024).
of certain trade policies, economic analysis Aid for Trade disbursement flows in 2022 reached
of the impact of the different types of S&DT an all-time high of US$ 51.1 billion (expressed in
provisions is lacking. For instance, as discussed in 2022 constant US$), marking a 14 per cent increase
Chapter B, developing economies, particularly LDCs, in real terms compared to 2021. After several years
have benefitted from preferential access to many of decline, the share of Aid for Trade disbursements
markets for exports, even if rules of origin and other allocated to projects in low-income economies has
factors may impact the use of these preferences. Tariff been increasing, and amounted to US$ 15.1 billion in
preferences have expanded exports from developing 2022. A large share of Aid for Trade disbursement is
economies and LDCs (Cernat et al., 2003; Bekkers allocated to building productive capacity. This includes
and Cariola, 2024), despite the administrative costs projects aimed at enhancing the skills and capabilities
associated with these preferences (Cariola and Lanz, of developing economies to comply with international
2022). Preference schemes have also been found standards and other regulatory requirements. Members
to raise exports to third-party economies through at the 13th Ministerial Conference underlined the
learning-by-exporting effects (Cherkashin et al., 2015). vital role and ongoing necessity of the Aid for Trade
As discussed below, Aid for Trade projects have also initiative in building capacity for trade.

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Empirical evidence points to the effectiveness their ability to participate actively, propose measures
of Aid for Trade in enhancing the trade potential and monitor potentially harmful policies of other trading
of developing economies and LDCs. Aid for Trade partners.
projects that focus on developing trade strategies,
LDCs and smaller economies tend to participate
negotiating and implementing trade agreements, and
in WTO negotiations as a group. As a member-
building productive capacity, have increased exports
driven organization, the WTO negotiation process
and enhanced the ability of exporters to meet trading
revolves around proposals put forth by interested
partners’ requirements (Lee and Oh, 2022; Yang,
individual members or groups of members, which are
Wang and Whang, 2023). Aid for Trade helps both
then discussed and negotiated among members in
to expand established trade relations, in particular
dedicated WTO bodies. A number of WTO members
between recipients and contributors, and to establish
have formed coalitions, often speaking with one voice
new trading relations (Cadot et al., 2014; Nathoo et al.,
using a single coordinator or negotiating team.6 For
2021; Aboushady, Harb and Zaki, 2024; Hoekman and
instance, in the WTO Committee on Agriculture, low-
Shingal, 2024).
income and lower-middle income economies have
(v) The participation of low-income economies mostly tabled joint submissions (see Figure D.6).
in the WTO has increased over time but
Capacity constraints have been holding some
remains limited
members back from participating in the regular
The WTO serves as a forum in which members WTO work. WTO transparency mechanisms enable
can negotiate new trade rules, oversee the members to monitor trade policies and resolve trade
implementation of trade obligations, and resolve issues in a non-litigious manner, and transparency
trade disputes among members. WTO committees improves decision-making by reducing trade policy
facilitate discussions and allow members to raise trade uncertainty. For instance, concerns raised in the
concerns about specific measures adopted by their TBT Committee when regulations are still at the
trading partners. Active participation in WTO activities drafting stage tend to reduce the likelihood of formal
is important for economies to reap some of the benefits disputes (Posada, Ganne, and Piermartini, 2020).
from the WTO. Yet many developing members face Yet participation in WTO committees by low-income
financial and human resource constraints that hinder members is limited. More than 60 members – mostly

Figure D.6: Greater participation of lower-middle income members in negotiations through joint
proposals, 1995-2023
20.1
20
Average number of submissions to
the Committee on Agriculture

15 10.3

11.5

10
8.1 8.4
8.2

5 6.9 9.8
7.9

3.3
1.5
0 0.2
Low-income economies Lower middle-income economies Upper middle-income economies High-income economies

Individual submissions Joint submissions

Source: Authors’ calculations, based on WTO data on submissions in the Committee on Agriculture.
Note: The figure displays the average number of submissions in the Committee on Agriculture between 1995 and 2023 by income group.
The average number of submissions for each income group is calculated by dividing the total number of proposals involving at least one WTO
member from that income group by the total number of WTO members having made a submission in that income group. The income groups are
based on the 2022 World Bank’s classification.

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 developing economies – submit, on average, less than the WTO functions. These may include limited
one TBT notification per year. In the Committee on commercial interest or trade impact, as well as a lack
Agriculture, low- and lower-middle income members, of financial and human resources. Although information
including LDCs and many small and vulnerable about participation is limited, low-income members
economies (SVEs), also tend to ask significantly tend to participate less in WTO negotiations, as well
fewer questions compared to other members (see as in transparency, monitoring and dispute settlement
Figure D.7), and they are more likely to support other activities, more likely because of resource constraints
members’ questions rather than initiate their own. than disinterest. For instance, members with limited
government capacity are likely to have a greater
Low- and middle-income economies use the
WTO dispute settlement mechanism less backlog of missing annual notifications required under
often than other members. A functioning dispute some WTO agreements, such as those on agriculture
settlement mechanism is essential for maintaining and support measures (see Figure D.9).7 In addition
a predictable trading environment. A dispute arises to limited legal and technical capacity and financial
when a member considers that a measure adopted constraints, factors such as information asymmetries
by another member is inconsistent with the latter’s and political and diplomatic considerations may
WTO obligations and nullifies or impairs the former’s also affect a WTO member’s decision to initiate a
benefits under the WTO agreements. Since the formal dispute.
WTO’s inception, members have initiated more than Various rules and resources contribute to
620 disputes, averaging 21 per year. Many developing facilitating the participation of lower-income
members have used the WTO dispute settlement
members in the WTO. The relatively low participation
mechanism to assert their trade rights and interests,
does not imply that the WTO is not accessible to all
but significant disparities still exist among WTO
members. The WTO provides technical assistance upon
members. Low- and middle-income members, have
request to build the capacity of developing economies
initiated fewer dispute proceedings than other WTO
and LDCs to comply with WTO obligations and fully
members, and have participated primarily as third
utilize their rights. In recent years, several technical
parties (see Figure D.8).
assistance activities on transparency obligations have
Several factors may explain a relatively low introduced tailored approaches to assist participants in
participation by lower-income economies in adopting a proactive and consistent response to meet,

Figure D.7: Greater participation of less-integrated members in committee work through joint
questions, 1996-2016
18.5
18

16 4.7
Average annual number of questions raised

14
in the Committee on Agriculture

12

10

8
13.9
6

4
1.9 1.7
2
1 1.3 0.8
1 0.6 0.9
0
Low-income economies Lower middle-income economies Upper middle-income economies High-income economies

Individual questions Joint questions

Source: Authors’ calculations, based on WTO data on questions submitted in the Committee on Agriculture.
Note: The figure displays the average annual number of questions raised in the Committee on Agriculture between 1995 and 2023 by income
group. The average annual number of questions for each income group is calculated by dividing the average annual number of raised by at least
one WTO member from that income group by the total number of WTO members having raised questions in that income group. The income
groups are based on the 2022 World Bank’s classification.

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Figure D.8: Lesser participation of lower-income members in dispute proceedings, 1995-2023

24.7
25
Average number of consultation requests

20
11.9

15 14.4
12.2

10 8.9
9.6
12.7
5
2.6
5.4
2.6 2.6
0
Low-income economies Lower middle-income economies Upper middle-income economies High-income economies

Request for consultations Request to join in consultations

Source: Authors’ calculations, based on WTO data on requests for consultations.

Note: The figure displays the average number of WTO consultation and dispute proceedings between 1995 and 2023 by income group. The
average number of consultation requests for each income group is calculated by dividing the total number of consultation requests involving at least
one WTO member from that income group initiating a dispute or joining in consultations by the total number of WTO members in that income group
having submitted a consultation request as complainant or third party. The income groups are based on the 2022 World Bank classification.

and remain in compliance with, transparency provisions offers developing and LDC members advice, support
(WTO, 2024c). The WTO also provides technical and training on WTO law, including representing them
assistance, including training courses and advice, in WTO dispute settlement proceedings at discounted
to support developing members’ participation in the rates. Several private sector law firms routinely
dispute settlement mechanism. In parallel, the Advisory represent developing members in the context of WTO
Centre on WTO Law (ACWL), established in 2001, disputes and sometimes offer pro-bono legal advice.

Figure D.9: Higher number of outstanding notifications in members with lower government capacity,
2022
4.5

4.0

3.5
Outstanding notification index

3.0

2.5

2.0

1.5

1.0

0.5

0
30 40 50 60 70 80 90
Statistical capacity score
Non-graduated LDCs Graduated LDCs Lower-middle-income economies Upper-middle-income economies High-income economies

Source: Authors’ calculations, based on World Bank data on statistical capacity score and WTO data on notifications.
Note: The chart displays the relationship between a member’s statistical capacity score and its outstanding notification requirement index
in 2022. The statistical capacity score, ranging from 0 to 100, measures a government’s ability to collect, analyse and disseminate high-
quality data about its population and economy. The outstanding notification index measures the normalized annual number of pending WTO
notifications (e.g., support measures). The income groups are based on the 2022 World Bank’s classification.

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(b) T
 he WTO can do more to help economies that are part of the ongoing WTO work on reforms. At the
have not fully benefited from trade 13 th WTO Ministerial Conference in 2024, members
adopted a Ministerial Decision recognizing the
Greater international cooperation is needed
progress made with the view to having a fully and well-
to foster the participation of lower-income functioning dispute settlement system accessible to all
economies in trade and to make the trading members by 2024.
system more inclusive. While many members
have benefited from the WTO through trade reforms, Enhancing trade policy transparency and
tariff reductions and stable trade policies, some information-sharing can further improve policy
have seen limited gains. These members, mostly decision-making, business operations and
developing economies or LDCs, tend to participate investor confidence in low-income economies.
less in the WTO, despite available S&DT provisions. All WTO members derive important benefits from
This challenge highlights the need for greater the various information-sharing and transparency
requirements in several WTO agreements (see opinion
international cooperation and WTO support in the
piece by Giovanni Maggi). Several transparency tools
face of geopolitical tensions, the digital revolution and
have been developed, such as the ePing SPS & TBT
climate change. Maintaining an open and predictable
platform, developed by the WTO in conjunction with
multilateral trading system is essential to support
the International Trade Centre (ITC) and the United
trade-led economic convergence. Accelerating
Nations (UN), and which catalogues over 50,000 TBT
the accession to the WTO of new members could
notifications to provide relevant regulatory information
further contribute to economic convergence. It is also
to firms exporting to new markets. However, as
important to extend commitments in dynamic areas
discussed above, given the uneven geographical
and ensure effective flexibilities, while addressing coverage of notifications, the information-sharing
impediments to low-income members’ participation in processes could be further improved. A recent
the WTO. ministerial decision, adopted at the 13th Ministerial
(i) M
 aintaining an open and predictable Conference, calls for reinforcing TBT information-
multilateral trading system sharing processes, encouraging early engagement
in commenting on draft technical regulations to
To avoid rolling back economic convergence mitigate unnecessary trade barriers, and sharing best
achieved and to create new opportunities for practices. Leveraging digital technologies could further
further convergence, it is essential to ensure enhance trade policy transparency by providing more
that the multilateral trade system remains open efficient data collection, analysis and dissemination
and predictable, for example, by reducing trade tools (Cernat, 2023), but the digital divide must be
costs, establishing a fully functional dispute settlement addressed to ensure that developing economies have
system and enhancing transparency and information- access to the necessary digital infrastructure and
sharing. Addressing trade barriers and improving skills.
trade facilitation are also essential to create a more
open and predictable trading environment, as well as In the current WTO reform debates, “reform
to encourage investment and technology diffusion. by doing” work has the potential to facilitate
As discussed in Chapter B, economies that have not the participation of LDCs in WTO work. As part
been converging often face higher trade costs and of the “reform by doing” work, effective participation
cumbersome customs procedures. In addition, as the of all members in WTO bodies was highlighted as
share of South-South trade is growing, access for being important to advance work in an inclusive
exporters from developing economies to the markets of manner and to meet members’ objectives. A number
of participatory challenges and concerns were raised
other developing economies is increasingly important.
in members’ proposals or contributions, including,
A fully functional and accessible dispute for example, disparity in the use of digital tools or
settlement system is crucial for enabling low- support to delegates, and several ideas to address
income economies with limited bargaining power these challenges and concerns were put forward.
to participate as complainants and respondents. The “reform by doing” work progressed in 2023. The
This is particularly important as increasing Goods Council, among others, implemented 127
geoeconomic tensions may disproportionately limit the reforms to improve its manner of functioning, as well
access of low-income economies to global markets as that of its 14 subsidiary bodies. These included
(WTO, 2023c). Efforts to improve accessibility to the significant changes to assist delegates, and the
dispute settlement system, an issue which a large introduction of digital tools to improve productivity
majority of delegations have identified as a top priority, and exchange of information. 8 Although some of those

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reforms are particularly helpful for LDCs, more could decreased in the last 20 years, thanks to digital
be done to ensure that LDCs can make use of the new technologies, reduced policy barriers and investment
opportunities (Wolfe, 2023). in infrastructure, they still remain significantly higher
than those in goods (WTO, 2021c).
Economies joining the WTO can, through their
accession reforms, benefit from improved Combining market-opening negotiations with
access to imported inputs, increased FDI, and international cooperation on regulatory issues
enhanced good governance. Economies that are can help further harnessing the potential of
not yet members of the WTO would benefit from services trade. Expanding multilateral commitments
accession, provided they undertake relevant trade and deepening international cooperation in services
reforms. While WTO members account for nearly 99 would allow economies to reap benefits beyond
per cent of global trade, 22 accessions are currently unilateral opening-up of services markets, and would
in progress, and several economies have not applied facilitate global value chain (GVC) participation
for WTO membership. The profiles of these latter (WTO, 2019; 2023c; World Bank and WTO, 2023a).
economies are diverse, and include some LDCs and International cooperation on regulatory issues can
commodity-exporters. The WTO accession process also contribute to reduce unnecessary differences
could be improved by enhancing technical assistance in domestic regulatory frameworks, as well as lower
and capacity-building support for aspiring members, unintended trade costs for services suppliers.
ensuring they can more quickly align their trade Informed by generally recognized good regulatory
policies and regulations with WTO agreements. practices, the new set of rules on Services Domestic
(ii) U
 pdating the rulebook Regulation – adopted in 2024 by a group of members
representing around 90 per cent of world services
In a context characterized by the digital
trade – aims to streamline authorization requirements
revolution, the need to transition to a low-carbon
and ease procedural hurdles faced by services
economy, and marked geopolitical tensions,
suppliers and investors. International cooperation on
economies need to address both their own trade
trade in services for development can also help to
barriers and those imposed by others to fully
mobilize greater levels of technical assistance and
capitalize on future trade opportunities and
capacity building, including in the context of Aid for
support economic convergence. As services trade
Trade, by addressing data gaps, supporting greater
and digital trade grow rapidly, upgraded commitments
participation of low- and middle-income economies in
from both well-integrated and less-integrated
policy discussions on trade in services, strengthening
economies can help low-income economies leverage
regulatory frameworks, promoting diversification, and
services and digital trade for development. Also, with
addressing key supply-side constraints, including
the transition towards a low-carbon economy altering
improving workers’ services-related skills (World Bank
comparative advantages, trade-related environmental
policies need to be better coordinated to ensure and WTO, 2023a). The WTO and the World Bank
that low-income countries’ trade opportunities are are developing an initial work programme on trade in
expanded and not inadvertently reduced. Similarly, services for developing economies.
given rising geopolitical tensions, international More cooperation on digital trade could benefit
cooperation is more than ever needed to address the less integrated or diversified low-income
use of export restrictions and tariff escalation and to economies, providing new trade opportunities
find alternative approaches. Finally, new commitments and supporting greater economic convergence.
could also address some of the barriers that hinder Digital technologies can drive economic growth by
low-income economies’ participation in trade, increasing productivity, reducing production costs,
identified in chapter B. enhancing economies of scale, improving financing
While services-led growth is increasingly seen efficiency, and promoting innovation through the
as a new path to development, many services exchange of ideas. Digital tools can also boost
sectors face significant trade restrictions, international trade that is digitally ordered and/or
especially in lower-income economies. Trade digitally delivered by reducing trade costs (IMF et al.,
costs in services trade are diverse, and include 2023). Digital trade can foster economic diversification
compliance costs imposed by “behind-the-border” by increasing the cross-border tradability of services.
regulatory measures, as well as information and Importing digitally-delivered services, such as financial
transaction costs related to cultural and institutional services, can further enhance firms’ competitiveness
differences and transport and travel costs (WTO, by providing new funding sources and improving
2019). Although trade costs for services trade have financial transactions (WTO, 2023c).

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 Opinion piece

Soft rules and the informational role

of the WTO
By Giovanni Maggi

Howard H. Leach Professor of Economics and International Affairs and

Director of Undergraduate Studies, Yale University

The WTO rules-based system is under a considerable (ii) T

 he WTO fosters the sharing of technical and evidence-
amount of stress. We may be at a juncture where the based information through specialized committees.
WTO needs to step back and shift emphasis, at least in If an expert committee persuades a government that
some domains, toward more “soft” rules that key players non-trade concerns (such as mitigating labour market
can find politically easier to comply with. disruptions, addressing environmental externalities
or protecting national security) can be addressed
The dispute settlement system is under stress due to the
effectively with less trade-restrictive measures than
disabling of the Appellate Body (AB). But it is important to
border measures, this can contribute significantly to
remember that, in the General Agreement on Tariffs and
global efficiency. This committee-based approach
Trade (GATT) years, the Dispute Settlement Body (DSB)
has already been embraced by the WTO in the area
was remarkably effective even without an AB, and this in
of specific trade concerns for behind-the-border
spite of the fact that the adoption of the ruling could be
measures. The same approach should be broadened
blocked by the losing country.
to a wide range of non-trade concerns.
One way to understand this is that an important role of
(iii) B
argaining theory suggests that better mutual
the DSB is to disseminate information across the trading
information about each other’s objectives and
community, thereby facilitating multilateral normative
constraints reduces the likelihood of bargaining
pressures. As argued in Maggi (1999), multilateral
failures (Ausubel, Cramton, and Deneckere, 2002).
enforcement does not have to take the form of all-out
Intuitively, governments aware of each other’s
multilateral trade sanctions in response to violations of
domestic political constraints are more likely to find
the agreement. A softer form of multilateral enforcement,
a compromise. This suggests that even the seemingly
for example, is one in which the trading community
modest institutional function of fostering “mutual
extends less “goodwill” to the country found in violation of
understanding” between governments may be
the agreement, and is perhaps less inclined to sign new
valuable.
agreements with that country.
The WTO may also have a role to play in informing the
Maggi (1999) also argues that the benefits from
global community of citizens about the dangers of a
multilateral enforcement, relative to a system based solely
collapse of the rules-based multilateral trading system.
on bilateral retaliation threats, are greatest when there are
Increasing public awareness of what the world would
strong imbalances of power between trading partners.
look like if the WTO ceased to exist might help to counter
This line of reasoning makes me hopeful that the WTO
the political pressures that push in the direction of
Dispute Settlement System may still play a positive role
protectionism.
even if there is a return to the GATT system.
In conclusion, I do not mean to suggest that the WTO
An informational role of the WTO that is sometimes
should give up on enforcing its fundamental rules.
understated is to enhance transparency and information
However, at a time when flexibility seems more critical
exchange between governments. For example,
to the survival of the WTO than the enforcement of hard
(i) T
he WTO trade monitoring exercise and Trade rules, it might be a good idea to shift the focus toward the
Policy Review Mechanism enhance the monitoring softer side of the WTO, at least for a while.
of government policies, thus complementing the
informational role of the Dispute Settlement System Disclaimer
discussed above. As discussed in WTO (2023c), there
is scope for strengthening these mechanisms. Opinion pieces are the sole responsibility of their
authors. They do not necessarily reflect the opinions
or views of WTO members or the WTO Secretariat.

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Despite overall growth, the participation of can catalyse more inclusive digital trade. The
low-income economies in digital trade remains Work Programme on Electronic Commerce tasks
limited. However, it could increase with greater policy the WTO Committee on Trade and Development
coordination. Digitally delivered service exports are with examining and reporting on the development
dominated by high-income economies and a small implications of digital trade, taking into account
number of middle-income economies. LDCs account the development, economic and financial needs
for a mere 0.2 per cent of global exports of digitally of developing economies. Aid for Trade projects
delivered services, a market share that has fallen in increasingly focus on digital trade, and development
recent years (WTO, 2023a). WTO simulations suggest finance tripled between 2015 and 2019, reaching
that improving digitalization could increase the share of a total of US$ 18.6 billion (OECD and WTO, 2024).
low-income economies in digitally deliverable services More recently, the WTO and the World Bank launched
from 0.5 to 1.8 per cent (Bekkers et al., 2024). While the “Digital Trade for Africa” project to help African
improving customs procedures and reducing import economies harness digital trade opportunities. The
costs can contribute to economic growth, the well- initiative aims to ensure that digital infrastructure
designed regulation of cross-border data flows also is supported by enabling regulatory frameworks, in
matters. A lack of data regulations can reduce customer order to magnify the benefits of digital trade, with
trust, while stringent data regulations can increase the WTO and World Bank levering their synergies to
compliance costs. Additional simulation results show provide concrete technical assistance and capacity-
that global GDP could drop by about 1 per cent if trade building activities (World Bank and WTO, 2023b).
costs related to data flows increased due to geopolitical As discussed in Chapter C, greater international
considerations. Conversely, global GDP could rise by cooperation on digital trade can help reduce business
nearly 2 per cent under a more coordinated data policy uncertainty and encourage the participation of smaller
scenario. businesses in the digital economy by mitigating the
fixed costs associated with complying with digital
Bridging the digital divide and preparing
regulations.
developing economies for digital trade requires
both domestic and international mobilization. Coordinated investment policies can contribute
Improving the adoption and effective use of digital to economic convergence by reducing trade
technologies requires a comprehensive and multi- costs, supporting infrastructure development
faceted strategy. This includes investing in physical and fostering innovation. Aligning regulations,
and digital infrastructure, enhancing digital literacy streamlining administrative procedures and improving
and skills, and establishing regulatory frameworks that policy transparency and predictability through greater
support digital trade. As they navigate the complexities cooperation can reduce transaction costs and stimulate
of regulating the digital economy, governments seek to investment. Collaborating on investment can also
balance facilitating the growth of the digital economy promote infrastructure development projects serving
and addressing new regulatory challenges. These the public good, such as transportation, energy,
challenges include cross-border data flows and telecommunications and water management systems,
competition.9 Domestic efforts to foster digital trade which are crucial for economic development because
need to be complemented by greater international they enhance connectivity, reduce transaction costs and
cooperation to build capacity in developing economies improve the overall business environment. In addition,
to improve digital connectivity and skills and to create economies can cooperate to promote innovation
a more transparent and predictable global digital and facilitate technology transfer through different
regulatory environment. A majority of WTO members mechanisms, including investment partnerships, R&D
consider that the existing WTO rules on digital trade initiatives, technology parks and technology-sharing
need to be updated and complemented to respond to agreements.
the changing nature of trade and to facilitate digital
Although low-income economies only receive
trade. Under the Joint Initiative on E-commerce,
a small share of FDI, they stand to benefit
90 WTO members, including many developing
significantly from improvements in investment
economies and five LDCs, are negotiating specific
facilitation. LDCs’ share of greenfield FDI projects,
rules on digital-trade-related issues. In July 2024, a
i.e., where a company establishes new operations in
stabilized text governing some aspects of digital trade
a foreign country from the ground up, declined from
was published.
3 per cent in the mid-2010s to 1 per cent between
International initiatives leveraging the specific 2021 and 2023 (UNCTAD, 2024a). More generally, FDI
expertise of different international organizations in low-income and lower middle-income economies

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has dropped by one third over the past two decades. more than reducing tariffs. Agriculture remains a
Strengthening international cooperation to ensure vital sector in low-income economies, accounting for
a stable and open investment climate is essential. over 58 per cent of employment on average in 2022
Over 125 WTO members, including many developing (see Box D.3). While, as discussed in Chapter B,
economies and several LDCs, finalized the Investment focusing solely on agriculture will not lead to economic
Facilitation for Development (IFD) Agreement in convergence, promoting agricultural trade and
November 2023. This plurilateral agreement, which improving the functioning of markets for food and
complements the Agreement on Trade-Related agriculture can, to an extent, contribute to enhancing
Investment Measures (TRIMs) and the General economic growth. Simulation analysis suggests that
Agreement on Trade in Services (GATS), focuses on removing domestic support and tariffs on agriculture
transparency, streamlining investment authorizations, and food products could raise global real income by
international cooperation and sustainable investment, US$ 48 billion (Anderson et al., 2023), almost 60 per
including responsible business conduct and anti- cent of which could benefit developing economies.
corruption measures. A recent simulation study However, opening up trade in high-income economies
suggested that implementing investment facilitation would only generate 60 per cent of the gains of
measures, such as online information publication and developing economies, highlighting the significance
streamlined authorization procedures, could generate of agricultural trade reforms in emerging economies
global welfare gains ranging between 0.6 per cent as well. LDCs would not necessarily benefit fully from
such broad reforms of domestic support and tariffs,
and 1.7 per cent, with the largest gains in low-income
because many of them already enjoy tariff preferential
economies (Balistreri and Olekseyuk, 2024).
access to markets in high-income economies (Bureau,
Although both tariffs and domestic support Jean, and Matthews, 2006). While a global elimination
heavily distort global agricultural trade patterns, of tariffs on agricultural goods would eliminate tariff
reducing domestic support could help LDCs preferences, abolishing domestic support globally

Box D.3: The economic importance of cotton for LDCs

Raw cotton fibre is a major source of export earnings for several LDCs. The cotton industry contributes
significantly to the economies of these LDCs by generating revenues and jobs for more than 20 million
people in Africa alone. Cotton is the second-largest exported crop globally, surpassing staple crops like
wheat, maize and rice. African economies export over 90 per cent of their annual cotton production. Benin,
Burkina Faso, Chad and Mali, the so-called Cotton-4 economies, are the leading cotton producers and
exporters of the African continent, together accounting for 3 per cent of total world cotton production and
around 8 per cent of world cotton trade, while cotton trade makes up between 3 and 10 per cent of their
national GDP (FAO, 2022).

The critical importance of the cotton sector for many vulnerable developing economies, which are competing
with high-income economies on the world market, is fully acknowledged in the WTO. WTO discussions on
the topic follow two tracks: trade aspects addressing distorting subsidies and trade barriers for cotton, and
development assistance for cotton production and its value chain.

The 2015 Ministerial Decision on cotton prohibits the use of export subsidies and calls for a further reduction
in domestic support for cotton producers. Developed and developing members in a position to do so also
agreed to grant duty-free and quota-free market access for cotton and cotton-related products from LDCs.
While the value of imported cotton from LDCs grew at an average annual rate of 6 per cent between 2016
and 2022, the LDC share in total cotton imports declined from 9 to 8 per cent during the same period,
although with significant fluctuation. Government support for cotton, including minimum support prices
and direct support to producers, remain high, particularly in several developing economies. Globally, these
support measures amounted to over US$ 8 billion in 2022 and 2023 (ICAC, 2023).

In parallel, recent years have seen increased cotton-specific development assistance. In 2023, over 55 per
cent of total cotton-specific assistance was directed to the Cotton-4 economies. Initiatives such as the
WTO-International Federation of Association Football (FIFA) initiative “Partenariat pour le Coton” and the
UN World Cotton Day seek to increase cotton transformation and investment further.

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could have mixed effects. It could reduce agricultural convergence. Such measures can lead to trade
incomes in high- and middle-income economies, tensions and increased trade barriers (WTO, 2022).
but slightly raise them in low-income economies
International cooperation on environmental
by creating new export opportunities. However, the
policies is essential to ensure coherence
effects are estimated to be modest, with average
between environmental and trade policies
farm incomes increasing by 0.33 per cent relative to a
and to prevent that policies hamper economic
baseline (Glauber and Laborde, 2022).
convergence. In the WTO, the revitalization of work in
International cooperation is needed to discipline the Committee on Trade and Environment and progress
or discourage the use of export restrictions in the environmental initiatives (Trade and Environmental
and tariff escalation that affect trade in raw Sustainability Structured Discussions (TESSD),
materials and to find alternative approaches. As Dialogue on Dialogue on Plastics Pollution and
discussed in Chapter B, tariff escalation and export Environmentally Sustainable Plastics Trade (DPP) and
restrictions are prevalent in natural resource sectors, the Fossil Fuel Subsidy Reform (FFSR) initiative) can
where raw materials face lower duties compared support good practices as well as coherent and fit-for-
to their processed forms, while exports are often purpose trade-related environmental policies. Efforts
restricted. Both export taxes and tariff escalation can have been initiated at the international level to foster
be “beggar-thy-neighbour” strategies, meaning that collaboration, develop relevant international standards
governments manipulate export prices (terms-of-trade and enhance coherence in national approaches to
effect) or promote domestic processing at the expense climate change. The WTO, in collaboration with the
of foreign production (production relocation effect) International Monetary Fund (IMF), the Organisation
(Latina, Piermartini, and Ruta, 2011). While tariffs are for Economic Co-operation and Development (OECD),
strictly regulated by the WTO, export duties are not United Nations Trade and Development (UNCTAD),
(WTO, 2010). Clarifying the appropriate use of export the United Nations Framework Convention on Climate
restrictions on critical materials would reduce policy Change (UNFCCC) and the World Bank, has launched
uncertainty and risks in GVCs. Greater transparency a joint task force on the alignment and coordination of
and information-sharing would also help firms to assess carbon pricing and other climate mitigation policies.
production capacities better and avoid bottlenecks
(iii) S
 upporting the implementation of
(WTO, 2021b). Tailored technical assistance and
WTO agreements
capacity-building programmes, focusing on specific
sectors with competitive advantages and offering International trade cooperation can help low-
individualized assistance to firms based on their unique income economies to overcome the challenges
needs, could help firms in developing economies to that hinder them from implementing their trade
move up the value chain and export more processed agreements. As discussed in Chapter B, low-income
goods. Implementing robust monitoring and evaluation economies often face difficulties in implementing
mechanisms, coupled with continuous feedback loops trade agreements due to limited financial resources,
from beneficiaries, can help to refine and improve the weak institutional capacity and infrastructural deficits,
technical assistance programmes. which impede their participation in international
trade. The WTO, through S&DT flexibilities and other
Uncoordinated trade-related environmental
initiatives, and collaboration with other international
policies can inadvertently impact the export
organizations, can help address these obstacles by
capabilities of developing economies. In the
assisting low-income economies in meeting SPS and
absence of internationally coordinated environmental
TBT requirements and in implementing specific WTO
policies, the adoption by individual economies of
agreements, such as the TRIPS Agreement or the TFA.
stringent environmental measures can prompt firms
to relocate to regions with lower environmental More work on S&DT implementation in the TBT
standards, increasing the risk of so-called pollution and SPS agreements is needed. The implementation
havens and carbon leakage (i.e., when firms transfer of S&DT provisions in the TBT and SPS agreements has
production from economies with stricter climate been receiving greater attention, as compliance with
policies to economies with laxer policies on carbon TBT and SPS measures can be particularly burdensome
emissions). Trade-related strategies to address for producers in low-income economies. Over the
carbon leakage, such as carbon border adjustments, years, several developing members, notably in the G-90
may inadvertently impede the export capabilities of group, have proposed modifying S&DT provisions to
developing economies striving for manufacturing- help exporting firms in developing economies adapt
led economic growth, and thus hamper economic more easily to new TBT and SPS measures adopted

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by developed economies.10 As part of the efforts to 2010s (OECD and WTO, 2024). While strengthening
make S&DT provisions in WTO agreements precise, trade-related infrastructure in low-income economies
effective and operational, a Ministerial Declaration on remains a priority, improving digital connectivity is
the implementation of S&DT provisions in the TBT and crucial to address the digital divide and accelerate
SPS agreements was adopted at the 13th Ministerial TFA implementation efforts.
Conference in 2024. The Declaration calls for various
The S&DT provisions of the TFA mark a significant
improvements, including training and technical
shift from the WTO’s traditional approach of
assistance, and increased transparency in notifications,
granting flexibilities and can serve as a blueprint.
including information about extensions to comment
The TFA stands out by providing a comprehensive
periods. Work is continuing at the WTO to enhance
flexibilities package without exemptions, unlike other
the implementation of S&DT for developing members,
WTO agreements that typically offer longer transition
including LDCs, in the SPS and TBT Agreements.
periods or exemptions to developing members.
Full implementation of the TFA could boost Notably, the TFA introduces a conditional link
the participation of LDCs in trade. National trade between implementation capacity and commitment
facilitation committees (NTFCs) and implementation requirements, allowing developing economies and
roadmaps are essential to accelerate the implementation LDCs to establish their own implementation timetables
of the TFA in low-income economies. Despite the based on their capacity (WTO, 2015). It sets general
extensive flexibilities provided by the TFA, and the principles and detailed instructions for the operation of
efforts of low-income economies to implement it, these flexibilities, and includes additional flexibilities for LDC
economies face specific challenges due to capacity members, emphasizing the need for assistance and
constraints, resource limitations and technology support for capacity-building. In that context, the TFA
gaps. These constraints are reflected in their lower also incorporates built-in flexibilities in its technical
implementation rate, as discussed in Chapter B. Helping provisions, such as conditioned obligations and best-
low-income economies to implement the TFA fully endeavour obligations. The approach to S&DT of the
could, potentially, increase their exports significantly. TFA has already inspired the S&DT provisions of the
In 2014, the Trade Facilitation Agreement Facility was recently finalized plurilateral Investment Facilitation for
created to assist developing and LDC members in fully Development Agreement and they could further serve
implementing the WTO TFA. NTFCs are crucial for trade as a blueprint for other agreements.
facilitation reform, as they coordinate efforts among
various stakeholders, including customs, government Greater support could help ensure that low-
agencies and the private sector. Other important income economies can implement an IP regime
contributing factors include a working, cooperative that responds to their needs. The way in which
partnership with the private sector, and an active and economies chose to implement international IP
sustained relationship with development partners standards domestically impacts the accessibility of
and contributors. In this context, implementation IP protection for inventors, artists and businesses. As
roadmaps and strategic plans can assist governments discussed above, the TRIPS Agreement requires the
in complying with implementation dates and accelerate implementation of minimum standards for IP protection
implementation, while enhancing transparency among and enforcement, while allowing considerable
stakeholders and helping to secure the necessary flexibilities, such as possible exceptions to substantive
support from contributors and development partners for IP rights, procedures and formalities for acquisition
trade facilitation reforms. and enforcement, administrative organization of IP
registration systems, and the selection of government
Greater collaboration among development agencies to exercise discretion and authority. Poor
partners, international agencies and non-
implementation choices can undermine the benefits
governmental organizations is needed to
of an IP protection system, resulting, for instance, in
accelerate TFA implementation in low-income
unnecessarily large financial and procedural costs.
economies. Following several years of decline, Aid
Unclear procedures and responsibilities can also
for Trade commitments on trade facilitation rebounded
limit the use of legitimate TRIPS flexibilities, such as
significantly, with a 150 per cent increase between
government use or compulsory licensing of patents,
2021 and 2022, almost reaching levels preceding the
making it difficult for domestic authorities to address
COVID-19 pandemic, at US$ 471 million. However,
IP abuse or overreach.
disbursements for trade facilitation have declined in
recent years, reaching US$ 252 million in 2022, which Low-income economies can take several
was slightly lower than disbursement levels in the approaches to maximize the benefits of IP

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protection. These include investing in education initiative continues to support a more inclusive, resilient
and training to build a skilled workforce capable and sustainable global trading system. The EIF, which is
of leveraging IP for economic growth, developing the only LDC-focused Aid for Trade programme, has an
infrastructure to support innovation, such as R&D important role to play in these efforts.
facilities and technology parks, and engaging in
(vi) Tailoring exemptions to the needs of
international cooperation to benefit from technology
developing economies and LDCs taking
transfer and global best practices in IP management
into consideration the importance of
(Ernst, Guderian and Richter, 2022).
commitments
A considerable array of technical assistance Developing countries are advancing the S&DT
is available to support developing economies negotiations under the coalition of the G-90.
in designing and implementing balanced and At present the G-90 has put forward 10 agreement-
workable IP systems. Various organizations, specific proposals to amend S&DT provisions to
including the WTO, the World Intellectual Property support the industrialization efforts of developing
Organization (WIPO), and other international entities, economies and LDCs, while minimizing the risk of legal
help developing economies navigate the complexities retaliation by other members.13 The proposal includes
of IP protection and enforcement.11 To help and a simplified procedure for applying trade restrictions
empower developing economies to exercise legitimate in development programmes under Article XVIII of the
TRIPS flexibilities in their domestic IP systems where GATT 1994. The G-90 also proposes a temporary,
they see fit, WTO members have also taken joint time-bound deviation from some of the disciplines
action to clarify and confirm the availability of TRIPS set out in the TRIMS Agreement, including the
flexibilities at the international level and expand them. prohibition to discriminate against imported products
Relevant instruments include the 2001 Declaration and implement quantitative restrictions on imports
on the TRIPS Agreement and public health,12 the or exports when adopting investment measures. In
Special Compulsory Licensing System that became a addition, the proposal would exempt LDCs from the
permanent part of the amended TRIPS Agreement in obligations of the TRIMS Agreement for as long as
2017, and, more recently, the 2022 Ministerial Decision they are classified as LDCs.
on the TRIPS Agreement, clarifying and streamlining
A comprehensive analysis of potential changes
options for access to COVID-19 vaccines. These
to S&DT provisions could contribute to improving
instruments contribute to providing agency to LDCs in
their effectiveness in supporting development
crafting balanced and effective IP systems tailored to
through trade. Achieving a delicate equilibrium
their specific needs.
between flexibilities, in particular those that require
Innovative Aid for Trade financing is critical as more policy space, and commitments is crucial in order
traditional development finance is under stress. In to preserve predictability, a policy aspect that is often
a post-pandemic world with geopolitical tensions, rising lacking or limited in developing economies. Proposed
debt burdens and a need for urgent climate action, flexibilities could be evaluated based on economic
governments, international organizations and financiers arguments in favour of S&DT, such as a low level of
are increasingly navigating budgetary constraints as technology, market failures and financial constraints
they mobilize funds to address these multifaceted crises. specific to lower-income economies, or a concentrated
Developing economies and LDCs anticipate a continued production structure (see Section D.1(a)). Assessing
need for Aid for Trade to support their integration into the ease of using S&DT provisions based on a legal
the global economy. Amidst traditional development and historical analysis of their past use can provide
finance challenges, modern Aid for Trade requires useful insights. Similarly, analysing the economic
new models and approaches to meet the increasing impact of S&DT proposals while taking into account
demands of developing economies. Innovative financing the specific circumstances of the targeted economy
mechanisms can complement traditional official can inform the discussions. In that context, reviewing
development assistance and public funding to support the available empirical evidence on the effectiveness of
trade integration and development efforts. Key strategies measures permitted by the proposed S&DT flexibilites is
to unlock new funding sources include leveraging important. For instance, and as discussed in Chapter B,
private sector investment through public-private empirical evidence on industrial policy, in particular local
partnerships and blended finance, utilizing innovative content requirement, remains mixed (Juhász, Lane and
financial instruments such as development impact Rodrik, 2023). Finally, assessing the potential effects of
bonds and guarantees. Moving forward, concerted the proposed S&DT flexibilities on other WTO members
efforts are necessary to ensure that the Aid for Trade can help identify their potential economic importance.

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However, the potential of such thorough analysis access to capital, resources and markets compared to
to facilitate progress in S&DT talks remains larger, more established companies.
uncertain. The results of the comprehensive analysis
Issues related to poverty reduction, inequality
discussed above may differ significantly from one
and inclusiveness have repeatedly been raised
economy to another, with cross-border spillovers of
in the WTO. The preamble of the Marrakesh
policy interventions likely to increase with economic
Agreement Establishing the WTO recognizes raising
size and level of development. Members have different
standards of living and real income, and ensuring full
views on whether to define sub-categories of developing
employment and sustainable development as central
economies as a means to providing more tailored
objectives of the multilateral trading system. The aim
S&DT flexibilities while minimizing potential adverse
of WTO disciplines is largely to minimize the negative
effects on other economies. Some members argue
effects of trade policies on trading partners and to
that development is a multi-faceted process that is
increase the economic benefits resulting from more
very difficult to quantify. They further contend that
trade openess. Addressing the distributional effects
each developing economy has the inherent right to
of trade within each economy is the responsibility of
decide independently when, where, and how to use
individual governments, by means of domestic policies,
S&DT provisions, based on its unique circumstances.
including adjustment and redistribution policies
For example, in the Ministerial Decision on TRIPS and
(WTO, 2017). Thus, the increased focus on
COVID-19 vaccines, developing members with existing
inclusiveness within the WTO is driven partly by
capacity to manufacture COVID-19 vaccines are
concerns that rising inequality and the perception that
encouraged to make a binding commitment not to avail
trade is leaving certain groups behind could lead to a
themselves of this Decision. This approach where certain
backlash against trade.
developing countries voluntarily opt out of using specific
flexibilities could serve as a blueprint for addressing the Trade and trade policies can have notable
thorny issue of increased commitments, while devising distributional effects, and the WTO, by
more tailored S&DT provisions. As discussed above, the promoting trade, can contribute to these effects.
TFA approach to S&DT is also a potentially viable way to As discussed in Chapter C, the impact of trade and
balance commitments and flexibility. trade policies on inclusiveness can differ significantly
between economies, and empirical evidence on
2. M
 aking the WTO and trade the impact of the WTO remains relatively limited.
Some WTO accessions have been shown to impact
more inclusive for people employment and wages, and in some cases reduce
and firms poverty, and there is evidence of the distributional
effects of certain WTO agreements. Apart from this
Trade inclusiveness within economies seeks to evidence, however, there is an unfounded perception
ensure that the benefits and opportunities of the that the multilateral trading system systematically
WTO and trade are accessible to all individuals favours larger companies over MSMEs.
and businesses. In particular, these benefits should
be extended to all those who have traditionally been (a) I nclusiveness of people and firms is
marginalized or excluded. Marginalized groups include increasingly taken into consideration
women, children, the elderly, people with disabilities, at the WTO
ethnic and racial minorities, sexual minorities, Incorporating inclusiveness into the WTO’s
indigenous peoples, refugees and low-income operations can contribute to creating a more
individuals. In the labour market, vulnerable workers fair and equitable global trading system. WTO
include low-wage, informal, casual or contingent disciplines offer policy space for governments to
workers and migrant workers. Ensuring that the WTO promote social inclusion and to address the possible
and trade are more inclusive also means creating a more adverse labour market impacts of trade. In recent years,
equitable global trading system by addressing barriers initiatives have been launched by some member groups
that prevent disadvantaged groups from participating to promote trade-related social inclusion, notably of
fully in international markets. Micro, small and medium- women and MSMEs. By addressing the participation and
sized enterprises (MSMEs) are considered to be inclusion in trade of marginalized groups and MSMEs,
among these disadvantaged groups because they as well as aligning its work with the UN Sustainable
are typically owned and operated by small business- Development Goals and engaging with stakeholders,
owners, including a significant number of women, and the WTO is supporting efforts to share the benefits of
often face certain specific challenges, such as limited trade more widely and to contribute to sustainable and

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inclusive economic growth. However, further research is other distributional outcomes in acceding economies
necessary to evaluate the direct and indirect effects of is limited and only captures the effect of tariff
the WTO on inclusiveness. reductions (Fan, Lin and Lin, 2020; Erten and Leight,
2021; Zhou and Zhang, 2021; Greenland, Lake
(i) W
 TO accession can contribute to poverty
and Lopresti, 2024). The studies available tend to
reduction
overlook broader accession-related reforms and policy
Accession to the WTO is associated with a changes, including services market-opening and the
reduction of poverty in acceding economies. As implementation of various policies and institutional
discussed in Section D.1, empirical evidence confirms reforms. Reforms undertaken during the process of
that GATT/WTO membership has a positive impact WTO accession have a positive impact on economies,
on economic growth through the reduction of trade and may have a potentially direct effect on poverty.
barriers. The WTO commitments that these economies
make also enhance good governance and the (ii) W
 TO disciplines do not restrict the use of
predictability of their market access conditions, which most domestic inclusion policies
in turn contribute to economic growth, an important Nothing in the WTO agreements restricts the use
engine of poverty reduction. Poverty reduction has, of non-discriminatory domestic adjustment and
on average, been more marked in economies that of social and redistribution policies to address
have acceded to the WTO since 1995, and that have the distributional impact of trade. Adjustment
made substantial commitments, including structural policies, such as active (e.g., training and job search
reforms, under Article XII of the Marrakesh Agreement, assistance) and passive labour market policies
compared to original developing GATT contracting (e.g., unemployment insurance) do not discriminate
parties that became WTO members pursuant to Article against imports, and typically have no trade-related
XI of the Marrakesh Agreement (see Figure D.10). cross-border spillovers (WTO, 2017). Policies
For instance, China’s accession to the WTO in 2001 that enhance overall competitiveness, such as by
resulted in welfare gains for nearly all households
improving education, infrastructure and the efficiency
across various income levels, with a strong pro-poor
of financial markets, can also help to facilitate the
distributional effect (Han et al., 2016).
reassignment of labour from contracting industries
Further research on the impact of WTO facing import competition to expanding sectors with a
membership on poverty reduction would be comparative advantage. Similarly, social protection and
valuable to identify and quantify specific redistribution measures can be used to compensate for
mechanisms. The empirical evidence on the causal possible adverse effects of income loss due to trade
impact of GATT/WTO accession on poverty and or technological changes, as discussed in Chapter C.

Figure D.10: Association of deeper WTO commitments with greater poverty reduction
60%
Average change in poverty headcount ratio

40%
relative to WTO entry year

20%

0%

-20%

-40%

-60%

-80%

-100%
-5 -4 -3 -2 -1 0 1 2 3 4 5 6 7 8 9 10
Years prior to and after joining the WTO
Low-income acceding member Low-income original member Middle-income acceding member Middle-income original member
(Art. XII) (Art. XII)

Source: Authors’ calculations, based on World Bank data on poverty and WTO data on membership date.
Note: The figure displays the average percentage change in the share of the population living on less than US$ 2.15 a day at 2017 purchasing
power adjusted prices relative to the poverty headcount ratio in the year when the economy joined the WTO. The average change in poverty
headcount ratio is weighted by the share in the world poverty headcount ratio. Year 0 corresponds to the year of accession to the WTO, which
is 1995 for original (non-Article XII) members. Only economies that were low-income and middle-income at the time of joining the WTO are
considered. The income groups are based on the 2022 World Bank’s classification.

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Other trade-distortive domestic instruments A number of provisions in the WTO Agreement
used to manage the distributional impact of on Agriculture aim to contribute to food security,
trade are subject to WTO disciplines. Tariffs or which is of particular importance to certain low-
subsidies may sometimes be used to protect jobs at income groups. Agriculture forms the backbone of
risk from import competition, just as export restrictions many low-income economies, providing employment,
may be implemented during food crises to protect food security and a significant portion of GDP, while
vulnerable populations. Policy space can be used by also supporting livelihoods and sustaining rural
members to implement discriminatory measures to communities. Women contribute significantly to
promote domestic inclusiveness, including poverty the agricultural economy, particularly in developing
reduction, for instance by relying on exceptions economies, often through small-scale, subsistence
relating to the protection of public morals.14 WTO farming that supports their families’ livelihoods. The
rules also include safeguards to address situations in Agreement on Agriculture exempts several support
which a member determines that imports of a product, measures from ceilings on domestic support (including
in significant quantities and under certain conditions, through its Annex 2, known as the “Green Box”, which
are causing or threatening to cause serious injury to exempts certain support programmes that cause no
the domestic industry producing similar or directly more than minimal distortion to trade and production).
competitive products. Finally, governments always Green box programmes include domestic support
have the possibility of renegotiating a concession. for general services – such as rural infrastructure,
However, this flexibility needs to be weighed up pest and disease control, training and extension and
against the benefits of making commitments that can advisory services – as well as natural disaster relief,
help, in the long run, to reduce poverty by promoting environmental programmes and regional assistance
economic stability and predictability. programmes. Developing members are also given
special treatment with respect to public stockholding
(iii) D
 ifferent WTO provisions can benefit some programmes for food security purposes, while all
vulnerable groups WTO members are allowed to provide unlimited
While some WTO agreements explicitly address support for domestic food aid to people in need. The
aspects of inclusiveness, a number of WTO Ministerial Declaration on the Emergency Response
provisions that do not mention it can still support to Food Insecurity and the Ministerial Decision on
it. For example, several WTO provisions explicitly World Food Programme Food Purchases Exemptions
refer to MSMEs. The Anti-dumping Agreement and from Export Prohibitions or Restrictions,16 adopted
the Agreement on Subsidies and Countervailing at the 12 th Ministerial Conference, express the
Measures (SCM) recognize that the evidentiary burden determination of WTO members to make progress
of investigations may impede MSMEs in attempts towards ending hunger and achieving food security
to file complaints or to respond in anti-dumping or and improved nutrition, and commits them to take
countervailing duty investigations, and thus require “concrete steps” to facilitate trade and improve the
that investigating authorities take these constraints into functioning and long-term resilience of global markets
for food and agriculture.17 The declaration also states
account. The TRIPS Agreement gives WTO members
that emergency measures introduced to adress food
leeway to promote the technological development of
security concerns should minimize trade distortions
their MSMEs. The TFA explicitly requires members
and be temporary, targeted and transparent, as well
to consider the specific needs of MSMEs requesting
as being notified and implemented in accordance
advance rulings on the treatment of imported goods,
with WTO rules. Members imposing such measures
and also requires that members not restrict MSMEs
should also take into account their possible impact on
from being made eligible to be “authorized operators”,
other members, in particular on LDCs and net food-
provided that they meet specified criteria.15 The new
importing developing economies.
disciplines on services domestic regulation aim to cut
trade costs and facilitate services trade, especially for The WTO Agreement on Fisheries Subsidies,
the benefit of small businesses. Among others, the adopted in 2022, recognizes the needs of
disciplines include the first gender provision in a WTO fisherfolk in developing economies and LDCs.
agreement, which prohibits gender discrimination when Fisherfolk in low-income economies typically
a participating member is authorizing the supply of operate on a small scale with traditional methods,
services. More generally, many other WTO provisions face economic vulnerability due to low and irregular
can contribute to advancing inclusiveness, even when incomes, have limited access to resources and
they do not explicitly target specific vulnerable groups. markets, and depend heavily on natural resources

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INTERNATIONAL COOPERATION

and community support, as they are likely to lack might best take advantage of e-commerce. Likewise,
adequate social protection. The Agreement on the Joint Initiative on E-commerce seeks to take into
Fisheries Subsidies sets new global rules to curb account the particular needs of MSMEs with regard
harmful subsidies and protect global fish stocks. It to e-commerce. The Committee on Government
grants developing economies a grace period with Procurement is implementing a treaty-mandated work
regard to prohibiting subsidies for illegal, unreported programme to support the participation of small and
and unregulated fishing and overfished stocks, and medium-sized enterprises in government procurement.
includes a due restraint clause to members to exercise The work programme has produced a report listing
caution and restraint when raising matters involving an best practices for promoting and facilitating the
LDC member. It also provides for technical assistance participation of SMEs in government procurement.
and capacity-building, including the creation of a fund Discussions on MSMEs are also occurring in other
to help developing members implement the agreement. committees, such as in the TRIPS Council with a focus
For the Agreement to become operational, two-thirds on support for MSME innovation.
of WTO members have to deposit their “instruments of
In recognition of the specific needs of MSMEs
acceptance” with the WTO.
and businesses owned by women, informal
The TFA can benefit MSMEs by simplifying and working groups among like-minded members
streamlining international trade procedures and on MSMEs and on Trade and Gender have been
improving information availability. Compliance established. In addition to providing policy guidance,
with border procedures commonly features among the Informal Working Group on MSMEs endeavours
the most important obstacles faced by MSME to develop concrete tools to support the participation
exporters (ITC, UNNEXT, and UN-ESCAP, 2016). of MSMEs in international trade. For example, it
As discussed in Chapter B and in Section D.1, the developed the Trade4MSMEs platform, which
includes step-by-step trade guides for MSMEs and
TFA lowers transaction costs and minimizes delays
policymakers. Meanwhile, the Informal Working Group
at borders by reducing red tape and enhancing the
on Trade and Gender seeks to promote women’s
efficiency and transparency of customs processes.
participation in global trade by sharing best practices,
These facilitation improvements can make it easier
exchanging views on how to apply a “gender lens” to
and more cost-effective for MSMEs to expand
the work of the WTO, reviewing gender-related WTO
their market reach, compete more effectively with
reports, and discussing how women can benefit more
larger firms, and integrate into global supply chains,
from the Aid for Trade initiative.
thereby fostering economic growth and development.
Empirical evidence points to a stronger probability of Poverty reduction, women’s economic
MSMEs exporting after enhancing trade facilitation empowerment and MSMEs’ participation are
measures (de Dios, 2009; Li and Wilson, 2009; Son increasingly being integrated into Aid for Trade
and Son, 2011; Hoekman and Shepherd, 2013; 2015). programming. Key strategic objectives that emerge
In particular, more recent analysis finds that the TFA strongly in national development strategies are poverty
mainly benefits MSME trade by improving information reduction, women’s economic empowerment, gender
availability, while other trade facilitation measures, equality and job creation, which are also increasingly
such as advance rulings, appeals procedures and reflected in Aid for Trade priorities (OECD and WTO,
the automation of border formalities, tend primarily 2024). These priorities highlight a commitment among
to benefit larger exporters (Fontagné, Orefice, and Aid for Trade stakeholders to working towards poverty
Piermartini, 2020). This suggests that trade facilitation eradication and more inclusive trade. For instance, the
measures may impact exporters beyond the fixed or Women Entrepreneurship for Africa (WE4A) initiative,
variable cost components of red tape barriers. launched by the European Union in collaboration with
several national development agencies, regional banks,
(iv) D iscussions on inclusive trade and trade- international organizations and private companies,
related technical and capacity-building provides women entrepreneurs with training, technical
initiatives are gaining traction in the WTO support and opportunities to access finance at every
stage of their business growth.
Discussions on inclusive trade, specifically
focusing on MSMEs and women, have gained The Enhanced Integrated Framework (EIF)
significant importance in different WTO helps LDCs participate in international trade,
committees and working groups. For instance, contributing to poverty reduction and women’s
the 1998 Work Programme on Electronic Commerce economic empowerment, among other benefits.
has a prominent MSME focus, examining how MSMEs The EIF assists LDCs and economies that have recently

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graduated from LDC status to mainstream trade into cooperatives also help to enhance their knowledge and
their own development plans, thereby improving decision-making for safe fruit and vegetable exports.
their opportunities to create trade-led inclusive and
(b) T
 he WTO can be made more conducive
sustainable growth, and it places a strong emphasis
to inclusive trade and growth for people
on inclusivity, specifically targeting greater inclusion
and firms
of women, young people and MSMEs. For instance,
in 2016 the EIF worked with the National Association While the WTO is committed to promoting
of Smallholder Farmers (NASFAM) in Malawi to inclusive trade, there is still room for further
introduce an innovative skills-building process for progress. If trade is to continue to foster opportunities
smallholder farmers – many of them women – resulting and growth in order to increase inclusiveness,
in a 48-percentage-point increase in mechanized international trade cooperation must be strengthened
farming and a 160 and 280 per cent rise in average in light of growing geopolitical tensions, the digital
incomes for groundnut and soya bean farmers, revolution and the need for sustainability. This can
respectively, which contributed to reducing incidences be achieved by building a more fair and inclusive
of poverty among beneficiaries from 56 per cent to multilateral trading system, strengthening information-
37 per cent. The project also facilitated the exports of sharing on inclusive trade policies and improving the
US$ 2.3 million worth of groundnuts and soya beans effectiveness of technical assistance.
to regional markets.
(i) S
 trengthening the WTO and updating its
Trade finance facilitation programmes can rulebook to make trade more inclusive
significantly benefit and enhance international
trade for MSMEs and women traders. Many Re-globalization through strengthened
economies and businesses, in particular in developing international cooperation centred on the WTO
economies, suffer from inadequate access to trade could help to reduce poverty in less integrated
finance, which causes them to miss out on economic and diversified economies. Trade fragmentation
and development opportunities. Trade finance requests poses a significant risk to the progress made in
by MSMEs and businesses led or owned by women reducing poverty and inequality (WTO, 2023c). While
face disproportionately high rejection rates. Trade some might benefit from a reorientation of GVCs,
finance facilitation programmes provided by regional vulnerable groups, in particular low-income households,
or multilateral development agencies and financial are likely to experience greater hardships due to rising
institutions aim to reduce the risks and improve the economic instability and trade costs. A reformed WTO
accessibility of trade financing for exporters and with a fully functioning dispute settlement mechanism,
importers, particularly in emerging markets, by offering to ensure a fair, transparent and predictable trading
guarantees and credit enhancements. For instance, the environment, holds the potential to help promote trade
Asian Development Bank’s Trade Finance Program18 and growth in countries that have not yet succeeded
provides loans and guarantees through partner banks in harnessing trade to develop their economies. Given
in Asia and the Pacific. that an important share of the populations of many of
these economies are living in poverty – the share of the
The Standards and Trade Development Facility population living in extreme poverty is 44 per cent on
(STDF) contributes to facilitating safe and average in low-income economies, compared to 10 per
inclusive trade. Established by the Food and cent on average across all economies – re-globalization
Agriculture Organization (FAO) of the United Nations, has the potential to contribute to poverty reduction.
the World Organisation for Animal Health (WOAH), the
World Bank, the World Health Organization (WHO) Stronger multilateral cooperation can also
and the WTO, the STDF aims to help developing help ensure that more firms and more workers,
economies build the necessary capacity to meet including women and workers from disadvantaged
international standards for food safety and animal groups, can participate in and benefit from trade.
and plant health. This enhanced ability to engage in Digital trade holds the potential to make trade more
regional and international trade contributes to more inclusive, while international initiatives leveraging the
sustainable economic growth, poverty reduction and specific expertise of different international organizations
improved food security in developing economies. could catalyse digital trade to make it more inclusive,
STDF projects are increasingly addressing women’s not only for less integrated economies, but also for
economic empowerment, as key lessons from past MSMEs and women (IMF et al., 2023; WTO, 2023c).
projects highlight the importance of promoting women’s Similarly, more open and predictable services markets
engagement at all levels, including senior management are not only key to fostering services-led development,
and project teams. Projects targeting women farmers in they can also improve the participation of women and

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MSMEs in the economy (WTO, 2023c). Combining conduct analysis to inform discussions. Aggregated
market-opening negotiations with international data can mask the specific effects of trade policies
cooperation on regulatory issues could help to on some vulnerable groups, highlighting the need
harness the potential of services trade further, both for more disaggregated data to assess the impact of
to foster services-led development and to strengthen tariffs and NTMs at the individual level. While there is
the participation of women and MSMEs in trade. some evidence that current tariff profiles discriminate
Implementation of the agreement on services domestic against low-income individuals and women, and that
regulation, for example, could save businesses, NTMs discriminate against SMEs, the data needed to
especially small businesses, US$ 150 billion conduct such analysis are not systematically collected.
a year globally (OECD and WTO, 2021). Full Trade-related data on certain vulnerable groups, such
implementation of the TFA, or multilaterally negotiated as persons with disabilities and indigenous peoples, is
reductions of tariffs and NTMs, would benefit MSMEs scarce.
relatively more than larger firms. Beyond the measures
Increased participation of representatives
discussed in Section D.2(a), the reduction of trade-
from vulnerable groups would enhance WTO
distorting domestic support, which is concentrated in
discussions on making trade policy more
only a few economies and is generally provided to large
inclusive. Public scrutiny is an essential aspect of the
producers, could also open new market opportunities
functioning of any modern international organization that
for low-income producers (WTO, 2023c). deals with public goods. The WTO Secretariat engages
(ii) S
 trengthening information-sharing on in various outreach initiatives to foster stakeholder
making trade policies more inclusive participation and promote transparency in global trade
discussions. The WTO Public Forum serves as the
Information-sharing, discussion of best largest annual outreach event, and provides a platform
practices, and data collection and analysis for stakeholders worldwide to discuss the latest
can facilitate the inclusive implementation of developments in trade. In addition, the WTO Secretariat
WTO agreements. One of the core functions of organizes events such as the Parliamentary Conference
the WTO – and one that is often taken for granted on the WTO, Trade Dialogues, and regional and Geneva-
after 70 years of multilateralism – is that it provides based seminars to engage with parliamentarians,
a forum for members to discuss and exchange views business leaders, civil society representatives and the
on trade-related issues. For instance, discussions in media. More recently, the WTO Director-General set
the TRIPS Council provide information on the various up a civil society group and a business advisory group,
IP-related initiatives taken by WTO members to in part to remove any suspicion of secrecy or bias
support their MSMEs. Similarly, the Informal Working within the organization. These advisory groups provide
Group on MSMEs compiled information on measures an informal platform to share views and debate the
taken by members to help MSMEs benefit from work of the WTO. WTO members also recognize the
Authorized Economic Operator (AEO) programmes, importance of engaging stakeholders for inclusive trade
an important issue for MSMEs, given that they have policy-making, with some suggesting modifications
difficulties in meeting AEO criteria.19 Another example to the WTO’s stakeholder work, while others favour
is the trade and gender dimension, which is gradually stakeholder involvement at the national level.
making its way into Trade Policy Review Body (TPRB)
discussions, mainly through the voluntary provision Actively involving vulnerable groups can make
of relevant information in trade policy review reports the implementation of WTO commitments more
prepared by members and their statements at TPRB inclusive by ensuring that their perspectives and
meetings (World Bank and WTO, 2020). interests are taken into account in the decision-
making process. The TFA serves as a noteworthy
Discussions on inclusiveness and information- example of how trade policy can become more inclusive
sharing in the WTO need to be informed by more by involving representatives from groups that may face
and better data and analysis. Members’ notifications discrimination in policy implementation. As discussed in
of trade measures (e.g., concerning agriculture, goods, Section D.1, the agreement requires the establishment
services, SPS, TBT and trade facilitation) could become of NTFCs to facilitate both domestic coordination and
a vehicle for voluntary information-sharing on domestic the implementation of its provisions. Past experiences
policies on inclusiveness, including poverty reduction show that effective NTFCs are responsive to the diverse
and labour standards, which could contribute to raising needs of both private and public sectors. In that context,
awareness and fostering discussions in different WTO NTFCs can promote more inclusive trade facilitation by
committees. The WTO could encourage and possibly establishing regular engagement with representatives
coordinate efforts to collect relevant data and to from vulnerable groups, either through ongoing

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consultations or more formal arrangements (e.g., addressed through other forms of international
working groups). They can support vulnerable groups cooperation, including at regional and bilateral
by providing access to relevant trade information and levels. As highlighted in Chapters B and C, trade
to capacity-building and training opportunities. NTFCs alone is not sufficient to achieve inclusive development.
can also advocate for these groups in national trade Instead, a range of complementary policies, including
policy discussions to promote inclusive and equitable infrastructure, institutions, redistribution and competition
policies. Sustained government support and resources policies are essential to ensure that trade works more
are, however, essential for NTFCs to achieve effective effectively to foster inclusive development.
and inclusive trade reforms.
The globalization of the world economy led to
(iii) I ncreasing support to making trade more growing interactions between economic policies
inclusive pursued by individual economies. These include
There are a number of areas in which greater interactions between the structural, macroeconomic,
cooperation at the multilateral level could trade, financial and development aspects of economic
contribute to more inclusive trade. They include policymaking. Therefore, international cooperation in
sustained efforts to further improve access to information, these areas is critical to ensuring that trade benefits
more extensive and well-coordinated capacity-building all. These various forms of international cooperation
on MSMEs and gender through technical assistance, complement the work of the WTO, particularly in
including Aid for Trade, and enhancing access to finance the context of rising geopolitical tensions, the digital
for MSMEs, in particular for businesses led or owned revolution and climate change.
by women. For example, the WTO and the International (a) I nternational cooperation to enhance
Trade Centre (ITC) launched a Women Exporters in the economic resilience
Digital Economy (WEIDE) Fund to assist businesses
led by women, as well as entrepreneurs in developing In an increasingly interconnected world marked
economies and LDCs, to adopt digital technologies and by geoeconomic tensions and uncertainty,
enhance their online presence. international cooperation plays a crucial role
in enhancing economic resilience. International
In a context of increasing geopolitic tensions cooperation can strengthen economic resilience
and climate change, the WTO could increase through coordinated trade policies, reducing trade
its efforts to support food security in different barriers and facilitating smoother cross-border
ways. It could more systematically use the Working transactions. This not only lowers transaction costs
Group on Trade, Debt and Finance to examine specific but also promotes predictability and stability in trade
concerns raised in the food security discussions about relations, essential for businesses navigating uncertain
the financing of food imports, which is particularly geopolitical landscapes. Enhancing economic
relevant for LDCs and net food-importing developing resilience is also important to enable vulnerable groups
economies. More focused discussions on identifying to withstand and recover from economic shocks.
strategies and mechanisms to mitigate and minimize
the adverse effects of export restrictions on importing International cooperation can help governments
countries could enhance food security. Increasing Aid to ensure that diversification policies are as
for Trade financing could help to improve agricultural effective as possible and that they do not have
productivity and infrastructure, and ultimately promote negative crossborder effects. Diversification
resilience and strengthen food security. Building new reduces countries’ exposure to country-specific
collaboration partnerships with other international demand-and-supply shocks, and governments can
and regional organizations and financial institutions take various measures to diversify their economy.
could help to enhance transparency and promote the Multilateral and regional cooperation, in the form of
implementation of relevant WTO commitments. various disciplines and initiatives, can contribute to
diversification by ensuring that markets are open and
3. P
 romoting inclusive predictable, and how international cooperation can
help to ensure that industrial policies are not used to
development through enhanced
diversify at the expense of trading partners and of an
international cooperation efficient allocation of resources.

While the WTO serves as the primary forum for Promoting financial stability and reducing cross-
cooperation on trade and trade policies, many border shocks requires special governance
development and inclusive policies are also mechanisms and international cooperation.

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Coordinated monetary policies and currency swap World Bank supports digital development focusing
arrangements among central banks can provide on expanding connectivity infrastructure (see, for
liquidity buffers and stabilize financial markets during example, World Bank and WTO, 2023b).
periods of volatility triggered by financial crises
FDI plays a pivotal role in the development of
and geoeconomic tensions. In the aftermath of the
digital infrastructure. In recent years, investment
2008-09 global financial crisis, G20 initiatives
in the communications and semiconductor sectors
led to the creation of the Financial Stability Board,
has shown the most significant growth, while the
which monitors assistance programmes provided to
software and information technology (IT) sector
developing countries by multilateral institutions.
has remained stable for over a decade (UNESCAP,
International cooperation also plays a role in 2023). Key multinational enterprises involved in
assisting countries that are hit harder and/or lack digital infrastructure and supporting digitalization
resources and abilities to cope. The World Bank in other sectors are driving advancements in
and the IMF provided substantial financial assistance telecommunications and digital technologies
to developing economies, which contributed to worldwide. The attractiveness of digital FDI is
promoting economic activity, increasing reserves and influenced by factors such as digital skills, venture
liquidity, and fostering market confidence. The WTO capital availability, presence of innovation hubs,
mobilized various actors to cooperate on increasing regulatory stability, and considerations regarding data
trade finance availability and market conditions for security, privacy laws and IP regulations (Stephenson,
both developed and developing economies. 2020). Other drivers for attracting digital FDI include
the use of international standards, the availability
(b) I nternational cooperation to harness
of e-payment services, and government support
the digital transformation
for starting a business and developing digital skills
Successfully harnessing the opportunities of (UNESCAP, 2023).
the digital revolution requires international
Digital infrastructure development is
cooperation. As discussed in Chapters B and C,
underpinned by international trade in IT-related
the digital revolution offers new opportunities for
goods and services. The WTO’s Information
developing economies to explore trade opportunities,
Technology Agreement (ITA) and its subsequent
but leveraging digital technologies for inclusive
expansion are contributing to digital connectivity
development requires infrastructure investment,
by eliminating tariffs on IT products covered by
regulatory capacity building, and addressing the
the agreement. Many of these products are critical
dominant market positions of large digital firms. Many
components of the digital physical infrastructure.
of these areas necessitate international cooperation.
According to the 2017 Affordability Drivers Index
(i) E
 nhance infrastructure and digital (ADI), 20 four out of the top five economies that
connectivity have the most affordable internet access – namely
Malaysia, Colombia, Costa Rica and Peru – are
Infrastructure and digital connectivity are pivotal
all ITA participants. Colombia, Costa Rica and
in enhancing trade capacity and lowering trade
Malaysia are also participants in the ITA expansion.
costs. Better infrastructure enables more economies
Opening services trade underpinned by multilateral
to participate in and benefit from international trade,
rules can also ensure the access and affordability of
while mitigating domestic inequality by improving
telecommunication services.
access to transportation, energy and the internet in rural
and remote areas. Given the substantial investments Several international organizations are actively
required to modernize energy infrastructure and involved in initiatives that aim to support
bolster digital connectivity, international cooperation governments in bridging the digital divide.
is indispensable to enable developing economies The UN is leading a High Impact Initiative on Digital
to access the required financing and expertise. This Public Infrastructure, 21 catalysing collective action to
is especially pertinent in economies where financial address this global challenge. UNCTAD’s eTrade for
limitations and technological constraints often impede All initiative aims to help developing countries harness
large-scale infrastructure projects. A secure and the benefits of digitalization, focusing on improving
reliable information and communications technology access to digital tools and technologies, fostering
(ICT) infrastructure is crucial for capturing the benefits digital entrepreneurship, and promoting inclusive
of trade enabled by digital technologies, and can be e-commerce. The International Telecommunication
a catalyst for economic growth. Traditionally, the Union (ITU) is championing numerous initiatives to

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extend mobile telephony benefits across all societal institutions also play significant roles in
strata, facilitating access to resources and providing promoting common regulations and standards
platforms for knowledge transfer. In addition, a growing in the digital realm. International cooperation
number of RTAs include provisions for cooperation through regional trade agreements facilitates trade
on ICT infrastructure. Specifically, 64 RTAs contain among participating countries by establishing common
provisions to promote ICT infrastructure development frameworks and harmonizing regulations to streamline
and diffusion, and address technical regulations, trade processes and reduce barriers to market entry
standards, and conformity assessment procedures (see opinion piece by Emanuel Ornelas). Organizations
related to ICT equipment (Monteiro, 2021b; Monteiro, like the International Organization for Standardization
Posada, and Tuthill, 2022). (ISO) and the International Electrotechnical Commission
Furthermore, international cooperation between (IEC) are crucial in developing standards, including
the WTO and other IOs dealing with digital those for digital technologies. The ITU supports the
infrastructure and connectivity can be mutually development of transparent and forward-looking legal
beneficial. Trade can be made more inclusive if and regulatory frameworks to stimulate ICT investment
international cooperation help close the digital gap. and promote universal, affordable and secure access to
At the same time, open trade and regulation can make ICTs. In addition, the World Bank’s Digital Development
investment in digital skills and infrastruture more Partnership, launched in 2016, assists developing
beneficial. Research shows that open trade enhances economies in strengthening regulations and skills to
the advantages of education and R&D activities leverage digital technologies.
(Ma, 2024).
(iii) A
 ddressing dominant market positions in
(ii) A
 dvancing a cohesive regulatory framework the digital economy
for digital development Effective competition policy and enforcement
A robust regulatory framework is essential to can play a pivotal role in promoting inclusiveness
safeguard consumer interests and facilitate across and within economies. As discussed in
the adoption of emerging technologies. Chapter B and C, higher corporate market power can
Ensuring that consumers are safeguarded from unfair result in a number of detrimental impacts on inclusive
practices, substandard products, and potential harm, development, including higher firm profitability at
fosters trust and confidence in the marketplace and the expense of consumers, discouraging innovation,
contributes to address inequalities within economies. and allowing firms to exercise power in the labour
Similarly, fostering accessible and affordable new market to set lower wages (Autor et al., 2020) or limit
technologies can contribute to prevent a digital divide. the benefits from trade for low-income consumers
Regulatory cooperation in intergovernmental and suffering from a non-competitive distribution services
multi-stakeholder fora can help to develop international sector (Schmitz, 2021). Markups charged by individual
norms and standards, building trust and enabling more firms in high-income economies can also act like
countries and firms to participate in international trade. implicit tariffs on goods exported from lower-income
International cooperation plays a pivotal role economies (Ding, Lashkaripour and Lugovskyy, 2024).
in advancing a regulatory framework to foster International cooperation on competition policies
inclusive trade. Because economies have diverse ensures a level playing field for businesses across
economic conditions and regulatory capacities, the borders, preventing anti-competitive practices and
establishment of shared standards can encourage fostering fair competition. Regulatory cooperation can
mutual understanding and cooperation. Certain be complemented with technical assistance activities
domestic policies, such as competition policies, can focused on the intersection of trade and competition
have important international ramifications when they policy, particularly in response to the needs of
are applied to multinational firms with global reach. developing economies.
Regulations adopted by large markets can influence
Robust competition policies are critical in the
global standards, a phenomenon known as the
digital age, as digital technologies enable firms to
“Brussels effect” or “California effect” (Bradford, 2012).
reach global consumers even without a physical
Effective management of the international spillover
market presence. The global scope of digital firms
effects of certain domestic policies requires globally
necessitates cross-border collaboration among
coordinated efforts to optimize their positive impacts.
competition authorities. The digital sector is particularly
While the WTO serves as a forum for regulatory prone to market concentration, due to substantial
cooperation, other regional and multilateral economies of scale and scope and strong network

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Opinion piece

Can regional and multilateral trade

liberalization work in tandem?
By Emanuel Ornelas

Professor of Economics, São Paulo School of Economics – FGV

The World Trade Organization was established More recently, RTAs have become increasingly “deeper”,
30 years ago, following the conclusion of the Uruguay tending to extend beyond the bilateral reduction of
Round of trade negotiations, the world’s last major tariffs to include a wide range of non-tariff barriers and
advance in multilateral trade liberalization. Since then, regulatory issues. While “depth” sounds benign, the jury
progress has been sporadic and limited to specific is still out on the merits of these additional provisions –
areas. More troubling, since the financial crisis of 2008- see, for example Fontagné et al. (2023).
09, the multilateral trading system seems to be moving
In fact, the extra depth often relates to measures that could
backwards, with the propagation of discriminatory trade
hinder rather than boost trade and welfare. In particular,
barriers and a growing number of trade disputes being
the tariff complementarity of shallow integration does not
left unresolved. Could a move toward deep regional trade
need to extend to those other measures. Moreover, these
agreements be a solution?
RTAs often include rules that transcend WTO rules, as is
The world did not stop reducing trade barriers in the case for some product standards and other technical
1995. The key difference was in the approach to trade barriers to trade. This may lead to concerns that the
liberalization, which transitioned from multilateral to expanding network of deep RTAs could render the WTO’s
preferential/regional. In the two decades following the multilateral framework unworkable – if not irrelevant. This
establishment of the WTO, the number of regional trade is troubling, because it could undermine a system that
agreements (RTAs) grew more than six-fold. Although the has proven very effective in bringing down trade barriers
pace has slowed in the last decade, new RTAs are still and in providing stability to world trade.
being signed, with 371 currently in force.
An unproven hypothesis, consistent with current trends, is
Is this the way to go? Should we be comfortable with that the multilateral trading system could coexist with the
the near-paralysis of multilateral trade negotiations if spread of RTAs, provided that the latter focus on the core
trade continues to be liberalized through RTAs? For issue of reciprocal trade liberalization – that is, the bilateral
many years, the answer has seemed to be yes. Except reduction of trade barriers. However, deep RTAs with
for the European Union, which is unique in many ways, provisions that conflict with existing multilateral rules may
most other RTAs until the early 2000s were “shallow”, render progress in multilateral negotiations unattainable.
focusing primarily on eliminating bilateral trade barriers.
If this hypothesis holds, it would be necessary to call for
While in theory the effect of those RTAs is ambiguous,
restraint in the scope of future RTAs, to ensure that they
the evidence shows that they created more trade than
do not impede broader multilateral liberalization. “Deep”
they diverted (Freund and Ornelas, 2010).
issues, important as they are, might be better addressed
One key reason is that, as countries liberalized within the within the WTO.
trading blocs outlined in the RTAs, they also (unilaterally)
lowered trade barriers for countries outside those blocs.
Disclaimer
This suggests that tariffs for bloc insiders and outsiders
are viewed as complementary: when one decreases, Opinion pieces are the sole responsibility of their
so does the other, albeit at a slower pace. The upshot authors. They do not necessarily reflect the opinions
is that the trade and welfare impact of RTAs have been or views of WTO members or the WTO Secretariat.
much larger than studies prior to the formation of the
agreements suggested.

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effects. International cooperation on competition competitive practices. Even without new specific rules
policies ensures a level playing field, prevents anti- on competition, the WTO could further collaborate
competitive practices and fosters fair competition. For with national and international competition agencies in
instance, research shows that competition positively areas where trade and competition intersect.
impacts digital connectivity in sub-Saharan Africa
(iv) I nternational cooperations on taxation in
(Buys et al., 2009). Effective competition policy within
the digital age
economies prevents monopolistic behaviour, promotes
market efficiency, lowers prices, increases innovation International coordination in taxation policies
and enhances consumer choice. It also creates is essential to prevent tax evasion and ensure
opportunities for MSMEs and marginalized groups, that trade contributes to inclusive development.
promoting inclusiveness. Taxation serves as a vital source of revenue for
governments to finance essential public services and
A few emerging economies have revised their infrastructure, yet a lack of taxation coordination in a
competition laws to intensify the scrutiny of globalized world could result in a “race to the bottom”.
digital platforms, while others are still in the
process of adopting digital competition laws. International capital tax bases have become
Given the global nature of digital firms, competition increasingly mobile in recent decades, in part
authorities are encouraged to enhance international driven by the rise in digital transactions. Coupled
cooperation and information-sharing, and to expand with open trade, this allows firms to relocate their
international best-practice guidelines on digital issues operations. As governments compete to attract
(Akcigit et al., 2021). Furthermore, there has been investors by offering favourable tax environments,
some debate about whether competition laws need they may succumb to pressure to lower tax rates and
to be revised to reflect a deviation from the consumer provide generous incentives, potentially compromising
welfare criterion (Khan, 2017). crucial revenue streams essential for public services
and infrastructure. Tax rates on capital have decreased
Several international organizations and regional substantially over time as governments have attempted
initiatives promote cooperation on competition to maintain an attractive tax environment (Egger, Nigai
policy. For instance, the OECD has conducted and Strecker, 2019; Devereux, Griffith and Klemm,
extensive research on competition within the digital 2002). In response to the increasing presence of
economy through its Competition Committee and the digital firms, governments are attempting to come
Global Forum on Competition. The OECD handbook up with different ways to tax the revenues of larger
on competition policy in the digital age22 serves as companies in their jurisdictions, with the aim both of
a blueprint for reform and cooperation. Detailed raising revenues and of protecting and promoting their
chapters or provisions on competition policy have domestic digital sector.
been incorporated in numerous bilateral and RTAs
(Anderson et al., 2018). There is a clear need to coordinate tax policies
internationally. The current international tax
While the WTO does not have dedicated rules for regime consists of a large network of bilateral tax
competition issues in international trade, certain treaties, generally based on the OECD or the United
provisions in the WTO agreements address Nations Model Tax Conventions. However, despite
these concerns. Generally, open trade allows more efforts toward harmonization, challenges persist in
players to compete in the market. Relevant GATS international tax systems. These include a lack of
market-opening commitments provide guaranteed transparency and of information exchange between
levels of market contestability and non-discriminatory authorities, inconsistent transfer pricing rules and
treatment of domestic and foreign services suppliers, widespread tax avoidance practices, all of which
fostering more competition in services markets. compromise tax collection across borders. In this
Certain competition policies on telecommunications regard, efforts to exchange information can greatly
are included in the Basic Telecoms Reference Paper reduce the incentive for tax evasion. For instance,
and are thus addressed by the GATS and services recent research finds that, since economies started
trade negotiations. Relevant competition-related to exchange bank information automatically with
provisions can also be found in the TRIPS and the foreign tax authorities in the second half of the 2010s,
revised Agreement on Government Procurement tax evaders have repatriated previously undeclared
(GPA) 2012. At the 1996 Singapore Ministerial offshore wealth, which has helped to close about
Conference, members discussed the interaction 70 per cent of the offshore tax gap in Denmark (Boas
between trade and competition policy, specifically anti- et al., 2024).

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Several international organizations aim to temperatures from rising by more than 1.5°C (IEA,
address international cooperation in taxation. In 2023). However, many developing economies are finding
2023, nearly 140 members of the OECD/G20 Inclusive it a struggle to finance energy infrastructure, in part
Framework on Base Erosion and Profit Shifting agreed due to debts resulting from the COVID-19 pandemic.
on an outcome statement for the two-pillar solution Thus, international cooperation in infrastructure is vital
addressing tax challenges from the digital economy. for ambitious climate action. Projects like the Noor
Pillar One23 establishes new taxing rights over large Concentrated Solar Power Complex in Morocco,
multinational enterprises with a digital presence, while funded by Climate Investment Funds, supplies clean
Pillar Two sets the base rate and approach for a new energy to 2 million people. International development
global minimum corporate tax. Although widely seen assistance such as Aid for Trade increasingly includes
as progress to reduce a “race to the bottom” in global environmental considerations (WTO, 2022).
tax competition, the solution’s contribution to inclusive
International trade is crucial to reduce
trade needs further assessment.
greenhouse gas emissions and transition
Some developing economies have also advocated to low-carbon economies. International trade
for a framework convention on international increases the worldwide diffusion and deployment of
tax cooperation under the UN. Many developing lower-emission goods, services and capital equipment
economies question the equity of the OECD process, (i.e., the equipment necessary to manufacture goods
citing concerns about high-income economies having and provide services), as well as of knowledge. It also
the first choice for additional top-up tax on multinational reduces the costs of these products and services
enterprises and the general low rate of minimum taxes, through efficiency improvements, economies of scale
while low-income economies have to forgo existing and learning-by-doing. For instance, the cost of solar
and future digital service taxes in exchange for a new electricity has plummeted by 97 per cent since 1990,
formula-based approach to profit reallocation that and a significant part of the cost decline of solar panel
could undermine their revenue base (McCarthy, 2022). systems has been attributed to GVCs, which have
Recently, the UN adopted a resolution stressing enabled producers to lower production costs and reap
universal international tax cooperation,24 acknowledging economies of scale by locating different production
the varied needs and capacities of all countries, stages in different countries (WTO and IRENA, 2021).
particularly developing ones. Market opportunities for low-carbon exports can also
spur more investment and innovation in new low-
(c) International cooperation to tackle climate carbon technologies and encourage efforts to better
change and facilitate the green transition adapt these technologies to local conditions.
International cooperation is indispensable Furthermore, climate adaptation is a key
in addressing climate change and other component of the global response to climate
environmental challenges on a global scale. It change. The UNFCCC Nairobi work programme helps
entails addressing global environmental challenges, economies to understand the impacts of, vulnerability
developing sustainable infrastructure and creating to and adaptation to climate change, in order to guide
financial mechanisms to support countries affected informed decisions. International organizations and
by climate change. At the same time, trade can regional development banks, like the United Nations
contribute to the fight against climate change, as it Office for Disaster Risk Reduction (UNDRR), support
allows access to affordable renewable energy and resilience to natural disasters. The ITU information and
equipment. Furthermore, harmonizing or enhancing communication technology for disaster management
the interoperability of environmental standards and initiative focuses on helping economies respond to
policies across borders ensures consistent and disaster risks and enhance resilience.
effective solutions to the climate challenge.
(ii) E
 nsuring coherence between trade and
(i) B
 uilding climate-resilient, low-carbon environmental policies is crucial for
infrastructure is essential sustainability
Climate-resilient infrastructure, renewable International cooperation ensures coherence
energy projects and sustainable transportation between environmental and trade policies.
are crucial for climate mitigation and adaptation. Without coordinated climate policies, isolated actions
According to the International Energy Agency, global can lead to consequences such as carbon leakage and
investment in energy infrastructure needs to reach competitiveness loss. This underlines the critical need
US$ 4.5 trillion per year by 2030 to keep global for coordination between climate and trade policies.

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Efforts within the WTO and other international resource reallocations necessary for long-term
organizations aim to foster collaboration, resilience, providing diversified sources of supply that
establish international standards, and encourage bolster protection against localized weather events.
convergence in national approaches to climate
(iv) C ooperation on anti-corruption is
change. Such cooperation is pivotal for achieving the
important to foster trust institution
UN Sustainable Development Goals while addressing
the interconnected challenges of climate change and International cooperation to combat corruption
international trade. As mentioned in Section D.1, the plays a crucial role in ensuring that the benefits of
WTO has launched a task force with the IMF, OECD, trade, including revenues from exports of natural
UNCTAD, UNFCCC and World Bank to develop a resources, are more widely shared. As discussed
common methodology to determine global carbon in Chapter B, the green transition offers new export
prices, and to ensure that plans to tax imports based opportunities for developing economies. However,
on their carbon emissions do not unfairly penalize robust institutions and complementary policies are
developing economies. necessary to foster wide economic development in
resource-abundant economies. Anti-corruption efforts
(iii) C
 limate actions can be enhanced through
can also ensure that international trade agreements
finance and trade
work more effectively. Research finds that information
Climate finance is crucial for addressing climate frictions and corruption perceptions can affect firm’s
change, especially for vulnerable developing participation in public procurement (Colonnelli et
economies. Climate finance commitments, such as al., 2024). In that context, the GPA would be more
the US$ 100 billion per year pledged by developed effective in supporting inclusive trade if accompanied
economies at the Fifteenth meeting of the Conference by anti-corruption policies.
of the Parties to UNFCCC in 2022, are crucial for
supporting climate action in developing economies. Efforts to combat corruption internationally
Policies such as carbon pricing further shape encompass various strategies, including
development prospects, and global cooperation information sharing and intelligence cooperation,
towards net zero emissions by 2050, supported by as well as developing legal frameworks.
mechanisms like a global emission trading scheme, Organizations such as the OECD play a crucial role
could significantly enhance real income for the LDCs in establishing standards and best practices related
compared to scenarios without climate action. to bribery, procurement, public financial management,
integrity in both public and private sectors, illicit trade,
Several international initiatives aim to channel
development assistance, and tax issues. International
climate finance to developing economies, but
agreements like the United Nations Convention against
more efforts are needed to scale up funding.
Corruption (UNCAC) offer a shared foundation for
The Green Climate Fund, 25 established under the
countries to adopt anti-corruption measures and
UNFCCC, provides finance through grants, loans and
establish a framework for mutual legal assistance.
equity investments, while the Loss and Damage Fund,
Additionally, collaboration is vital for the recovery of
set up in 2023, supports developing economies in
assets acquired through corrupt practices. Cooperation
coping with climate impacts. The estimated adaptation
on anti-corruption is also promoted in a number of
costs for these economies are US$ 215 billion per year
recent RTAs.
up to 2030 (UNEP, 2023). Enhancing transparency
and accountability, and exploring innovative financing (d) International cooperation on trade
mechanisms like green bonds and carbon pricing, and within-economy inclusiveness
are crucial to mobilize additional resources. Global
There is an ongoing debate on the introduction
collaboration is essential to ensure that there is
of labour and other inclusiveness considerations
adequate funding for climate adaptation and resilience.
in trade policies and the need for international
Trade plays a pivotal role in enhancing climate cooperation. Some, mostly developed, economies
action by effectively reducing costs and consider that the lack of basic labour standards puts
amplifying impact. It enables economies, particularly workers at risk and creates unfair competition. They
the most vulnerable ones, to better prepare for and argue that imposing restrictions on imports from
respond to climate shocks through access to essential economies that do not uphold these standards, or
technologies and critical goods and services, such favouring imports that meet them, would encourage
as food and healthcare products. Open international better working conditions and promote fair competition.
markets facilitate the economic adjustments and Conversely, many developing economies consider that

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restricting imports that do not respect certain labour on employment and emphasizes that the violation of
standards is a covert form of protectionism, potentially fundamental labour principles and rights cannot be
increasing production costs and making their exports used as a legitimate comparative advantage.
less competitive. In this context of diverging views,
Provisions addressing various dimensions of
trade measures taken unilaterally by importing
inclusiveness within the economy are included
economies to raise labour standards in exporting
in an increasing number of RTAs. RTAs are
economies have the potential to create trade tensions.
sometimes viewed as a “laboratory” in which new
International cooperation on trade and labour types of provisions are designed to address new
recognizes that violations of workers’ rights issues and challenges. More than 310 RTAs include
should not be used as a trade advantage, and provisions that explicitly relate to some of the
labour standards should not be misused for dimensions of inclusiveness, including human rights,
protectionist purposes. The 1996 Singapore workers’ rights, gender equality, indigenous peoples’
Ministerial Declaration recognizes the International rights and MSMEs’ participation (see Figure D.11).
Labour Organization (ILO) as the competent body Provisions in RTAs are known to be heterogenous,
to establish and address labour standards. The and inclusiveness-related provisions are no exception.
Declaration cautions against misusing labour While many provisions on inclusiveness promote
standards for protectionist trade purposes, and cooperation activities, other provisions establish
emphasizes the importance of preserving economies’ specific level-playing-field disciplines or exemptions.
comparative advantage, especially that of developing Labour provisions can be found in an increasing
economies in which wages are low. It further number of unilateral, preferential, bilateral
acknowledges that economic growth and development, and regional trade agreements, as well as in
facilitated by expanded trade, play a role in promoting international investment agreements. About one
fair labour standards. While the Declaration assigns third of the total number of RTAs in force and notified
the regulation of trade and labour to the respective to the WTO in 2022 included labour provisions
international organizations, it does not imply that trade (Corley-Coulibaly, Ebertand and Pelin Sekerler, 2023).
policies should overlook labour standard violations. While developed economies continue to be the main
The 2008 ILO Declaration on Social Justice for a Fair proponent of labour provisions in RTAs, an increasing
Globalization recognises the effects of trade policies number of RTAs negotiated between developing

Figure D.11: Increasing numbers of provisions on inclusiveness in RTAs, 1990-2021

0.7

0.6

0.5
Inclusiveness RTA index

0.4

0.3

0.2

0.1

0
1990 2000 2010 2020

North-North RTA North-South RTA South-South RTA

Source: Authors’ calculations, based on a mapping of provisions on inclusiveness in RTAs.

Note: This figure shows the evolution of provisions on inclusiveness in RTAs between 1990 and 2021. The inclusiveness RTA index ranges from
0 to 1 and considers 33 explicit types of provisions addressing different dimensions of inclusiveness, including human rights, workers, MSMEs,
poverty, gender, indigenous communities, people with disabilities, and other minorities and vulnerable groups. “North” is defined as high-income
economies, whereas “South” is defined as low- and middle-income economies, according to the 2022 World Bank’s income group classification.

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economies include explicit labour provisions. Labour related policies and protecting indigenous traditional
provisions typically include commitments to uphold knowledge, cultural expressions and genetic resources
international labour standards, such as those set from misappropriation. These provisions often
by the ILO, which cover issues like child labour, complement labour provisions on the elimination of
forced labour and the right to collective bargaining. employment discrimination based on race, religion,
Another common type of labour provision establishes age, sex or other grounds, including disability, sexual
mechanisms for cooperation and dialogue between orientation and gender identity. Some provisions further
the parties to improve labour conditions, often through clarify that domestic programmes designed to assist
technical assistance and capacity-building initiatives. vulnerable groups, including women and indigenous
Some RTAs also incorporate dispute resolution communities, do not fall under the obligations that fall
mechanisms to address non-compliance with labour under the RTA’s chapters on government procurement
provisions, allowing for consultations, and in some or services (Monteiro, 2021c).
cases, sanctions, if labour standards are violated
Some provisions on inclusiveness in RTAs
(Corley-Coulibaly, Postolachi and Tesfay, 2021). 26
promote social corporate responsibility and
Some relatively recent detailed provisions specifically target certain types of firms,
on inclusiveness in RTAs specifically target including MSMEs and artisans. Recent provisions
disadvantaged groups. These include some women, call on parties to these RTAs to encourage enterprises
vulnerable workers, indigenous peoples and persons within their territories to incorporate best practices
with disabilities. Many of these provisions identify of corporate social responsibility voluntarily in their
gender and gender-related issues as key areas for internal policies (Monteiro, 2021a). An increasing
cooperation.27 Other, more specific, provisions set but limited number of RTAs also includes provisions
out commitments concerning domestic policies, to promote and cooperate on fair and ethical
including adopting and effectively enforcing gender- trade schemes (see Box D.4). In recognition of the

Box D.4: Due diligence and responsible sourcing in supply chains

Due diligence requirements and responsible sourcing practices are integral components of fair trade and
ethical trade schemes. These schemes are designed to ensure that trade practices are fair, transparent and
sustainable. Due diligence involves assessing and mitigating risks related to human rights, environmental
harm and corruption in supply chains, while responsible sourcing entails selecting suppliers that adhere to
ethical and sustainable practices, such as by not using forced labour or child labour.

Due diligence and responsible sourcing are driven both by private sector initiatives and government
regulations. Companies adopt these practices as part of their corporate social responsibility strategies,
responding to industry standards, certifications, and consumer and investor pressures. Some governments
provide the legal framework and enforcement mechanisms to ensure compliance and accountability. Several
international bodies also provide guidelines to help companies implement due diligence and responsible
sourcing practices, such as the OECD Guidelines for Multinational Enterprises and the UN Guiding
Principles on Business and Human Rights.

Empirical evidence on the effectiveness of due diligence and responsible sourcing initiatives is limited.
Some studies point to the risk that focusing solely on improving working conditions within specific GVCs
may inadvertently widen working condition gaps between workers involved in GVCs and those who are not,
as GVCs generally have better working conditions compared to firms not engaged in international trade (see
the opinion piece by Alonso Alfaro Ureña, Benjamin Faber, Cecile Gaubert, Isabela Manelici and José Pablo
Vásquez).

Despite potential unintended effects, due diligence and responsible sourcing initiatives can contribute to
improving working conditions and inclusivity within GVCs. However, continuous cooperation between trading
partners and a careful consideration of their potential harmful effects must be taken into consideration. The
growing need for GVC coordination among governments may create a favorable environment for greater
collaborative actions to tackle trade effects, ensure consistency in decision-making over time, and seize
opportunities to promote inclusivity within GVCs.

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INTERNATIONAL COOPERATION

Opinion piece

The promise and pitfalls of responsible

sourcing in global value chains
By Alonso Alfaro Ureña, Chief Economist, Central Bank of Costa Rica and
Professor, Department of Economics, Universidad de Costa Rica; Benjamin
Faber, Associate Professor, University of California, Berkeley; Cecile Gaubert,
Associate Professor, University of California, Berkeley; Isabela Manelici,
Assistant Professor, London School of Economics; José Pablo Vásquez,
Assistant Professor, London School of Economics.

Multinational enterprises (MNEs) are facing increasing meaningful benefits to workers at suppliers targeted by
demands by policymakers and the public to improve RS policies. On the other hand, RS imposes additional
working conditions in their supply chains. In response, costs on MNE suppliers. If these costs are not sufficiently
it has become common practice for MNEs to impose borne by the MNEs and their foreign customers, RS can
minimum labour and safety standards on their suppliers, give rise to adverse knock-on effects on local firms and
typically called “responsible sourcing” (RS) policies. The workers due both to lower chances of finding jobs at RS
reasons why MNEs choose to adopt these standards suppliers and to increased local prices, as MNE suppliers
probably vary. Their leadership may have altruistic may also produce for domestic consumption.
objectives, unrelated to profits or shareholder value. RS
policies may also be more calculated: MNEs may be Alfaro Ureña et al. (2022) provide a theoretical framework
attempting to avoid the reputational cost of workplace to dissect these forces and study the drivers of this trade-
accidents, or to increase demand by improving their off. The benefits of RS for workers in sourcing countries
image and branding. are larger when MNEs experience increased demand due
to RS rollouts from their customers. However, the benefits
A natural concern regarding these mostly voluntary RS to workers are reduced, and could even be negative,
policies is that they may just be “hot air”, and may not when MNE suppliers have little bargaining power and
in reality bring about meaningful changes for workers thus bear the cost of the policy, and when much of the
in sourcing countries. However, mounting empirical affected production is sold locally, leading to increased
evidence suggests that RS policies do indeed affect local prices.
MNE suppliers and their workers.
While the current state of research suggests cautious
One recent study by Boudreau (2024) found that MNE
optimism about the ability of MNEs’ RS policies to
enforcement programmes of occupational safety and
improve working conditions among their suppliers, the
health (OSH) committees after 2013 significantly
overall impacts of RS policies on the host economy’s
increased supplier compliance with regulations in
workers are, in general, ambiguous and will depend on
Bangladesh. Another study by Alfaro Ureña et al. (2022)
the empirical context. There is therefore large scope for
found that, when MNEs in Costa Rica imposed RS
further empirical and theoretical work on these topics
standards on their suppliers worldwide, these RS rollouts
to help deliver the stated objectives of RS and limit the
led to increased wages and workplace amenities for low-
unintended side effects.
wage workers at suppliers of the MNEs. At the same
time, the study found significant decreases in sales and
employment in domestic firms not supplying to MNEs Disclaimer
applying RS policies.
Opinion pieces are the sole responsibility of their
These findings underscore an important trade-off authors. They do not necessarily reflect the opinions
involved in RS policies. On the one hand, RS may bring or views of WTO members or the WTO Secretariat.

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 Box D.5: Policy space to adopt labour-related trade measures in the WTO

Part of the debate on trade and labour in the trade policy community revolves around whether WTO rules
could potentially allow members to adopt labour-related trade measures, such as prohibiting imports of, or
imposing higher import tariffs on, products made under poor working conditions.

WTO members could seek to justify such measures under some of the geneneral exceptions set out
in Article XX of the GATT 1994 or Article XIV of the GATS, such as those relating to “public morals”,
“protection of human [i.e., workers’] life or health”, “securing compliance with laws or regulations [i.e., labour
laws]”, or “products of prison labour”. If a labour-related measure were found to fall within the scope of any
potentially exception, the member may need to demonstrate, among other things, that the contribution of the
measure to the achievement of the objective outweighs its trade restrictiveness, with consideration given to,
among other things, the existence of reasonably available alternative measures (for exceptions containing a
necessity test). The importing member would also need to demonstrate that the challenged measure is not
applied in an arbitrary or discriminatory manner.

Other WTO agreements also contain provisions that could accommodate policy space for WTO members
to adopt or enforce measures addressing unfair labour standards. For example, the TBT Agreement allows
WTO members to maintain any regulatory distinction based on legitimate objectives if applied even-
handedly.” It remains to be determined whether such “regulatory distinction” could be based on production
methods relating to labour standards, i.e. whether the goods produced were made in respect of fundamental
or core labour standards or not.

Members’ engagement may be necessary to have further clarity on the applicability of the existing rules
and/or the need to update existing WTO rules to cover labour-related issues, including but not limited to the
enforcement of internationally agreed labour standards. For the time being, there is no consensus among
WTO members.

specific needs of and challenges faced by MSMEs, effects on trade when combined with appropriate
an increasing number of RTAs also include explicit accompanying measures. The empirical evidence
provisions which, for example, promote cooperation regarding labour provisions in RTAs points to mixed
on MSMEs among the parties, exempt MSMEs or results, with some studies indicating a positive impact
programmes supporting MSMEs from specific trade on labour outcomes (ILO, 2016), while others suggest
obligations set out in the RTA, or aim to improve a negative impact of specific labour provisions, such
access to trade-related information, including through as those on child labour (Abman et al., 2023). For
websites (Monteiro, 2016). 28 instance, compared to simple bans of child labour,
active education and income support policies, such
Empirical evidence on the effectiveness of
as subsidizing households for school attendance, are
provisions on inclusiveness and labour in RTAs is
found to be more effective in addressing child labour
scarce. RTA provisions on inclusiveness usually take
without jeopardizing inclusiveness and widening
the form of best-endeavour clauses, and many focus
inequalities (Fernandes, Rocha and Ruta, 2023).
on enhancing cooperation and capacity-building. As
Recent evidence shows that labour provisions can
some of these provisions on inclusiveness are relatively
impact trade differently depending on the parties’
new, there is limited evidence on their effectiveness.
capacity to comply with the requirements. Provisions
However, certain RTAs have established institutional
on sustainable development (covering both labour
arrangements to monitor the implementation of specific
and the environment) have been found to increase
inclusiveness provisions, such as those related to
developed economies’ labour-intensive exports but
labour and gender. These monitoring exercises may
reduce developing economies’ labour-intensive exports
provide new information and analysis. Further research
(Hoekman, Santi, and Shingal, 2023). However, labour
and more disaggregated data are needed to assess
provisions, when accompanied by strong cooperation,
comprehensively the effectiveness of these provisions
have resulted in an increase in exports from low-
on promoting inclusiveness.
income economies (Carrère, Olarreaga and Raess,
Labour provisions in RTAs are more likely to 2022). Non-binding provisions on labour standards,
improve working conditions or to have positive environmental protection and civil and political rights

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have also shown to be more effective in improving rules also provide flexibilities to developing members,
performance in certain areas when accompanied by including LDCs, through S&DT provisions.
financial support (Francois et al., 2022).
Despite progress, the participation of some
Explicit references to the social dimension of developing members in the different WTO
sustainable development in recent ministerial functions remains limited. While there is evidence
declarations and documents could lead to that preferences can help low-income economies
more focused discussions on labour-related increase their exports, little is known about their ability
trade measures at the WTO. The Outcome to use other types of S&DT provisions effectively. While
Document from the 12 th Ministerial Conference and participation in the different WTO functions is crucial for
the Ministerial Declaration from the 13 th Ministerial reaping benefits from them, many developing members
Conference refer explicitly to the importance of all continue to face constraints that hinder their ability to
three pillars of trade and sustainable development – engage actively.
economic, environmental and also social. Drawing
More can be done for economies that have
on experiences with labour provisions in RTAs, some
not yet derived all the benefits from trade. The
members may wish to explore the possibility of having
WTO’s mandate to facilitate open and predictable
a discussion about labour-related trade measures
trade remains pivotal in promoting development
in the WTO. For instance, in 2023 the Committee
amidst evolving geopolitical tensions and digital
on Government Procurement held an information-
revolution. It is important to maintain and deepen the
sharing workshop on the implementation of labour
system. Improving the accession process, furthering
standards in the government procurement systems
commitments in trade in services and digital trade,
of parties to the GPA. Under consideration was how
and more coordination in the area of trade-related
to conduct government procurement processes in a
environmental policies, will be essential to trigger a
manner that protects and advances labour standards,
new and more inclusive wave of trade-led growth.
while respecting international trade commitments. The
question of the policy space available in the WTO S&DT provisions also need to be made more
agreements for members to adopt labour related trade effective. More support and capacity-building
measures is still open (see Box D.5). could help low-income economies to make better
use of S&DT provisions aimed at facilitating the
Greater collaboration between international
implementation of WTO agreements. Finding the right
organizations is needed to make trade more
balance between binding commitments and effective
inclusive. Under the “Decision on achieving greater
flexibilities is essential to provide relevant policy space
coherence in global economic policy-making”, the
without undermining the predictability and stability of
WTO already collaborates with the IMF and the
trade policies achieved through credible commitments.
World Bank. The WTO also works with many other
While there is no “one-size-fits-all” approach to
international organizations. The WTO can enhance
flexibilities, commitments should be aligned with
cooperation with international organizations to
a member’s capacity to implement them, while
promote infrastructure, improve policy coherence,
recognizing that certain carve-outs can undermine
maximize international spillovers and limit the negative
some of the benefits of a rule-based system. The
impacts of specific policies. These collaborative
S&DT provisions of the TFA, which allow developing
efforts could involve partnerships, information
and LDC members to set their own implementation
exchanges and leveraging the WTO as a platform for
timetables based on their capacity, could serve as a
international organizations, governments, businesses
blueprint. In addition, evidence on the effectiveness of
and non-governmental organizations to collaborate
trade policies to promote development, the rationales
and share information on trade-related issues relevant
for S&DT treatment, and information on cross-border
for inclusiveness across and within economies.
spillovers could also help to design S&DT flexibilities,
while minimizing potential adverse effects on other
4. Conclusions economies.
The WTO promotes convergence through a Questions related to the distributional effects
combination of commitments and flexibilities. It within economies and to the inclusiveness
supports a rules-based trading system which enhances of WTO agreements have increasingly been
economic performance and benefits the less powerful raised in the WTO. Trade and trade policies have
by promoting non-discrimination and by pursuing a significant distributional effects and the WTO – given
wider membership. To promote development, WTO that it promotes trade – contributes to these effects.

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There is, however, little direct empirical evidence on discriminatory effects. WTO discussions on making
the distributional effects of the WTO. While each trade policy more inclusive could also benefit from
government has the autonomy to determine how to the increased participation of vulnerable groups in
manage the redistributive impact of trade policies, the information-sharing sessions, as well as more active
WTO agreements do not limit governments that wish participation of these groups in domestic processes,
to use non-discriminatory domestic complementary including in the implementation stage. More technical
policies, such as labour market adjustment policies, to assistance, including Aid for Trade, could be targeted
address it. The flexible nature of the WTO agreements at reducing poverty and increasing inclusion. In a
also allows for the use of specific discriminatory trade context of increasing geopolitical tensions and climate
instruments to address the redistributive effects of change, the WTO could also increase its efforts to
trade policies, including safeguards in response to support food security.
import surges.
Trade and complementary policies for
A more inclusive economy requires policies that inclusiveness across and within economies
reduce the barriers and obstacles that currently can be made more effective by broadening and
prevent marginalized individuals, firms and strengthening international cooperation. While
regions from participating fully in and benefitting the WTO remains a cornerstone for international
from global markets. While few WTO agreements trade cooperation, many trade-related developmental
explicitly address aspects of inclusiveness, many and inclusive policies are also addressed through
other WTO provisions are relevant for inclusive trade. other complementary channels of international
Discussions on inclusiveness and specific inclusive collaboration. Different international organizations
capacity-building initiatives are gaining traction in the deal with some of the complementary policies that are
WTO. essential for enabling trade to support development
and inclusiveness. For example, to achieve inclusive
Information-sharing, research and tailored digital trade, it is necessary to establish cross-
technical assistance could contribute to a more cutting cooperation, to address investment in digital
inclusive implementation of WTO agreements. connectivity infrastructure and to develop a cohesive
While WTO members hold different views on how digital regulatory framework and competition policy.
to address social inclusiveness in trade agreements, Improving coherence and coordination among
more information on the effects of certain trade policy international organizations could amplify the positive
measures on disadvantaged women, MSMEs or low- effects of each individual organization’s work on
income households could help to address potentially development and inclusiveness.

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TRADE AND INCLUSIVENESS:
HOW TO MAKE TRADE WORK FOR ALL D INCLUSIVE TRADE AND
INTERNATIONAL COOPERATION

Endnotes
1 While the effects of terms of trade on economic growth remain 12 Available at https://www.wto.org/english/thewto_e/minist_e/min01
theoretically ambiguous, a significant strand of the empirical _e/mindecl_trips_e.htm.
studies report a positive effect of terms of trade on output and
economic growth (Schmitt-Grohé and Uribe, 2018). 13 Recently, there has been a broader debate on industrial policy taking
place in the General Council and some other bodies, including the
2 Overseas territories of GATT contracting parties that became CTD. The African Group is among the main proponents having
independent usually became contracting parties themselves through tabled several proposals.
sponsorship under Article XXVI:5(c) of the GATT, without making any
new concessions. In contrast, Article XXXIII of the GATT required 14 Measures satisfying those requirements would be justified either
new contracting parties to negotiate terms of accession, often under GATT Article XX(a) (public morals) or, for measures affecting
involving tariff concessions, known as the “GATT ticket”. trade in services, under GATS Article XIV(a) (public order).

3 The focus here is on the patent system and its impact on 15 Authorized operators are operators which, as they meet specified
development. Note that the implementation of provisions on criteria, are granted provision of additional trade facilitation
copyright (individual artists), designs (provision on textile designs), measures related to import, export, or transit formalities and
geographical indications (local branding for traditional products) procedures.
or trademarks (affordable protection for MSMEs) may affect 16 See https://www.wto.org/english/thewto_e/minist_e/mc12_e/mc12
inclusiveness, but this is not covered in this report. _e.htm.
4 Another type of flexibility that can be used to justify development 17 See WTO Ministerial Declaration on the Emergency Response
policy measures is GATT Article XX(a) (“General Exceptions”) to Food Insecurity (WT/MIN(22)/28) and Ministerial Decision on
and the General Agreement on Trade in Services (GATS) Article World Food Programme (WFP) Food Purchases Exemptions from
XIV(a) (“General Exceptions”), which allow WTO members to Export Prohibitions or Restrictions (WT/MIN(22)/29) (available at
protect public morals and public order. For example, in Brazil – https://docs.wto.org/).
Taxation (dispute settlement numbers DS472 and DS497), Brazil
argued that the objective of its discriminatory PATVD (“Program 18 See https://www.adb.org/what-we-do/trade-supply-chain-finance-
of Support to the Technological Developments of the Industry of program/trade-finance.
Digital TV Equipment”) tax measures was to bridge the “digital
19 See WTO official document number INF/MSME/W/47/rev.1
divide” and to achieve “social inclusion” – two development-related
(available at https://docs.wto.org/). According to the World
policies. The panel concluded that such measures were “not
Customs Organization (WCO), an AEO is “a party involved in the
incapable of contributing to the objective of bridging the digital
international movement of goods in whatever function that has been
divide and promoting social inclusion” and were thus considered
approved by or on behalf of a national customs administration as
to be designed as measures to protect “public moral” objectives
complying with WCO or equivalent standards for supply chain
under GATT Article XX(a) (DS472/R; DS497/R, paragraph 7.583).
security”.
However, while the panel accepted that such an objective could
fall within the scope of Article XX(a), it ultimately found that the 20 See https://a4ai.org/research/affordability-drivers-index/.
challenged measure did not contribute to the policy objective of
bridging the digital divide and promoting social inclusion and that 21 See https://www.undp.org/digital/digital-public-infrastructure.
there were better and more efficient alternatives. Parties did not
22 See https://www.oecd.org/daf/competition-policy-in-the-digital-age/.
appeal this conclusion of the panel report.
23 See https://www.oecd-ilibrary.org/taxation/pillar-one-amount-b_21
5 See WTO official document number WT/COMTD/LDC/W/71
ea168b-en.
(available at https://docs.wto.org/).
24 See https://press.un.org/en/2023/gaef3597.doc.htm.
6 These coalition groups include the African Group, LDCs and SVEs.
See for instance https://www.wto.org/english/tratop_e/dda_e/ 25 See https://www.greenclimate.fund/.
negotiating_groups_e.htm
26 The Generalized System of Preferences (GSP) scheme established
7 See WTO (2024c) for a discussion on outstanding notifications. by the European Union provides deeper market access conditioned
upon ratification of and compliance with several international
8 See WTO official document number JOB/GC/359/Rev.3 (available
conventions in human rights, labour rights, the environment and
at https://docs.wto.org/).
good governance. These preferences are withdrawn in case of
9 As discussed in Section D.4, coordination of competition policy can violations of these international conventions. Under the African
be important for economic convergence by addressing concerns Growth and Opportunity Act (AGOA), adopted by the United
that monopoly profits in digital markets are concentrated in a small States, developing economies can benefit from preferential market
set of high-income economies and by avoiding an erosion of tax access to the United States, provided that they do not engage in
bases in low-income economies as a result of profit-shifting. gross violations of internationally recognized human rights and that
they collaborate in international efforts to eliminate human rights
10 The G-90, also known as the Group of 90, is an alliance of the violations.
poorest and smallest developing economies. The G-90 has
proposed allowing developing economies longer comment periods 27 The WTO database on gender provisions in RTAs is accessible at:
on proposed technical regulations or standards, and longer https://www.wto.org/english/tratop_e/womenandtrade_e/gender_
compliance periods. The proposal also suggests that developed responsive_trade_agreement_db_e.htm.
economies might provide support to developing economies
28 The WTO database on MSME-related language in RTAs is
adversely affected by the new standards, to ensure no or minimal
accessible at https://www.wto.org/english/tratop_e/msmesandtra
disruptions to their exports. The G-90 proposal also foresees
_e/rtaprovisions_e.htm.
compensatory adjustment support by developed economies in case
of urgent implementation of standards to maintain the market shares
of developing economies, as well as support for their technological
and infrastructural capabilities.

11 Information on all technical assistance programmes relative to IP is

reported each year to the TRIPS Council and are made available on
the WTO website (https://www.wto.org/english/tratop_e/trips_e/
intel9_e.htm).

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E
WORLD TRADE REPORT 2024

Conclusions

Over the past 30 years, the world has witnessed 19 per cent of global merchandise trade in 2021.
a period of unprecedented income convergence, Trade cost reductions between 1995 and 2020 are
accompanied by a steep reduction in poverty, estimated to have led to a 5.7 per cent increase in
but inequality remains high. Between 1995 and global real GDP over the period, with low-income
2023, global per capita income, adjusted for inflation, economies growing by around 23 per cent. Trade
increased by approximately 65 per cent, while the per has also supported the creation of millions of jobs,
capita income of low- and middle-income economies including better paid jobs.
increased by more than to 191 per cent. This notable
However, it is true that, while many have
economic growth helped reduce extreme poverty in
benefited from international trade, some
low- and middle-income economies, which declined
individuals, regions and economies have not
from 40.3 per cent in 1995 to 10.6 per cent in
benefited as much as others. A number of low-
2022. Nevertheless, a staggering 712 million people
and middle-income economies have faced challenges
worldwide still live in extreme poverty, and inequality
either to participating in international trade or to
levels remain consistently high.
leveraging trade to diversify their economies. As
Given these figures, it is understandable that outlined in Chapter B, high trade costs, whether
there is some disagreement about the effects resulting from restrictive trade policies at home and
of globalization on inclusiveness between and abroad, inadequate infrastructure, geographical
within economies. The debate has formed the basis remoteness or institutional challenges, have rendered
for this year’s World Trade Report. Unfortunately, it difficult for some economies to participate to trade.
two misleading assumptions still underlie much of Obstacles to structural transformation, such as
this debate: that trade is detrimental to development inefficient labour and capital markets, restrictions to
and inclusiveness, and that WTO rules prevent foreign direct investment, or limited capacity to absorb
governments from adopting ambitious development foreign technologies, have made it difficult for other
and inclusiveness policies. economies to diversify and expand the sectors in which
they have comparative advantages. Failure to spread
The first misleading assumption is that, as trade
the gains obtained through trade more widely within
only favours wealthy individuals and economies,
the economy prevents individuals and firms within that
it exacerbates inequality and proves detrimental
economy from leveraging trade, in turn.
to development and inclusiveness. This has led
to calls to protect some domestic industries and jobs Within any economy, the gains from trade may
by limiting imports of certain goods and services. In be unevenly shared out depending on different
fact, the reality is that trade has played a crucial role factors, including people’s employment and
in reducing poverty and in enabling many low- and consumption patterns. As discussed in Chapter C,
middle-income economies to catch up to high-income some individuals may struggle to adapt to import
economies. Trade between low- and/or middle-income competition because they lack the skills needed to
economies increased from 5 per cent in 1995 to participate in export-oriented industries, or they may

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TRADE AND INCLUSIVENESS:
HOW TO MAKE TRADE WORK FOR ALL E CONCLUSIONS

face mobility barriers that prevent them from relocating The second misleading assumption about
to more prosperous regions to benefit from new job globalization and inclusiveness is that WTO
opportunities. Some regions have struggled to adapt rules prevent governments from adopting
to new economic conditions following trade-opening. ambitious policies that could promote
Some individuals may not benefit from price reductions development and inclusiveness. In fact, the overall
associated with trade openness because of high objective of the WTO is to help its members to use
transport costs and uncompetitive distribution sectors. trade as a means to raise living standards, create
Nevertheless, the impact of trade on development and jobs and improve people’s lives. In this context, the
inclusiveness has been sufficiently diverse across WTO already contributes to economic convergence
economies to suggest that obstacles are due more to and inclusiveness by promoting an open, rules-based
a lack of sound trade policies and adequate domestic and predictable multilateral trading system. Because
complementary policies accompanying the process of economic reform is a condition of WTO membership,
globalization than to the process itself. the WTO also contributes to improving governance.
WTO members that implemented reforms and made
In fact, it is not through less trade that more
deeper commitments during their WTO accession
economic convergence and inclusiveness can
negotiations have grown, on average, 1.5 percentage
be achieved. As the world grapples with increasing
points faster than they would have without those
geopolitical tensions, the digital revolution and
reforms and commitments.
a greater push for sustainability, achieving more
sustained inclusiveness and poverty reduction may Nothing in the WTO agreements restricts the use
require, among other things, a sizeable middle class. of non-discriminatory policies for development
A robust middle class supports the overall development or inclusiveness. Many distortions that lead to
process by driving domestic consumption, fostering unequal effects from trade-opening are often rooted
entrepreneurial activities, and contributing to social in structural domestic factors that are best addressed
stability. Many developing economies are unlikely to be through domestic complementary policies, such as
large enough to have a sufficiently large middle class labour, education or taxation policies. Trade-related
to experience sustained economic growth without instruments that some governments may choose to use
access to large, lucrative export markets, and indeed, for inclusiveness purposes, such as tariffs, subsidies
for economies that face high trade costs, limited trade and export restrictions, are subject to WTO disciplines
participation is precisely the problem. Meanwhile, to avoid potential negative spillovers onto other
for economies that do trade but do not manage to economies and potential retaliatory measures that
diversify and move up the value chain, less trade is not would undermine overall inclusiveness. In addition,
a solution either. Inward-looking policies that promote WTO agreements offer various flexibilities, including
import substitution through domestic production special and differential treatment (S&DT) provisions,
are fiscally costly and may discourage innovation which are only available to developing economies or
and increase the risk of trade retaliation from other least-developed countries (LDCs). A number of trade-
economies, ultimately hindering long-term economic related technical and capacity-building initiatives at
growth and inclusiveness. the WTO, including the Aid for Trade initiative, also
contribute to making trade more inclusive.
Protectionism does not protect the overall
economy, and it does not support overall Nevertheless, although trade is part of the
inclusiveness. While trade-restrictive measures solution for a more resilient and inclusive global
may protect some sectors and jobs from import economy, trade alone may not be enough.
competition, they do this at a high cost for the rest A more inclusive global economy requires policies
of the economy, which, consequently, will suffer from that reduce the barriers and obstacles that currently
higher prices, lower incentives for innovation, and prevent marginalized individuals, firms, regions and
reduced competitiveness in exporting industries. economies from participating fully in and benefitting
Trade-restrictive measures can also lead to retaliatory from global markets. Besides trade policies, to
measures from other economies, and these may increase the market access of marginalized groups
threaten jobs supported by trade. In addition, strategies and economies, complementary policies are essential
to relocate or reshore certain manufacturing industries to enable individuals and firms to move to where the
may not, in reality, bring back many jobs, because the gains from trade are, and to share the gains from trade
automation and digitalization of production processes more evenly. Such complementarity policies may cover
are increasingly essential if firms are to remain various aspects of the economy, including financial,
competitive in international markets. labour, energy and housing markets. Many are relevant

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WORLD TRADE REPORT 2024

for both economic growth and inclusiveness, as approaches to address the digital economy and the
they address market distortions (e.g., competition), low-carbon transition can, depending on their design
increase capacity to engage in international trade (e.g., and implementation, create potential distortions and
via education) and mitigate the risks and disruption trade tensions. Solutions could also include improving
associated with trade openness (e.g., by providing data collection, research and information exchange on
economic safety nets). It is important to note that the negative spillovers across economies of unilateral
trade and domestic policies can reinforce each other. policies and on the uneven effects of trade policy, and
While trade policy effectiveness depends on well- enhancing the participation of vulnerable groups in
designed complementary policies, open trade policies trade policy decision-making processes.
can also enhance the effectiveness of many of these
Enhancing coherence between the WTO
complementary policies through economies of scale,
and other international organizations could
improved efficiency and competition, enhanced
magnify their respective positive impacts on
economic growth and risk diversification.
inclusiveness across and within economies.
The WTO already fosters inclusiveness across and Greater international cooperation is necessary to tackle
within economies, but it can do even more. In a emerging challenges in areas crucial to the future
world increasingly fragmented by geopolitical tensions, of trade for inclusiveness, such as services, digital
maintaining an open and predictable multilateral trading and green trade. Many international organizations
system is essential to prevent the regression of progress focus on complementary policies that could enable
achieved in economic convergence, and to support trade to support development and inclusiveness,
even greater development and inclusiveness. Economic such as investment, education, competition and
fragmentation – unwinding trading relationships and taxation. Greater collaboration across international
turning to unilateral policies – would make the prospect organizations could be helpful in the implementation
of a a more inclusive world more remote. To prevent of WTO commitments, by addressing infrastructure
this, Chapter D argues that the WTO could do more. and skill gaps and facilitating the adjustment to trade
First, it could play a more proactive role in facilitating openness. In turn, the open and predictable trading
the implementation of existing WTO agreements, environment maintained by a reinforced multilateral
such as the Trade Facilitation Agreement, which trading system could help to amplify the positive impact
would unlock significant potential gains for developing of other international organizations on inclusiveness.
economies. Second, it could improve predictability
This year’s World Trade Report has reviewed the
by means of an effective and fully functioning dispute
key role that international trade and trade policy
settlement mechanism, given that binding commitments
plays in supporting growth and inclusiveness.
significantly reduce trade policy uncertainty, which in
Although some groups, regions and economies have
turn increases investments and fosters growth. Third,
not yet managed to integrate successfully into the
the WTO could enhance its efforts to address evolving
global economy, trade is an essential element of the
trade challenges, particularly trade in digital, green and
solution to move the global economy toward more
services sectors, to seize opportunities for convergence
equality and inclusivity. However, to achieve these aims,
and inclusiveness through digital and environmental
more coherent and mutually supportive national and
transformation.
international policies, and more global cooperation,
Strengthening the WTO’s deliberative and are required.
monitoring functions is important to ensure
more inclusive trade. Uncoordinated unilateral

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TRADE AND INCLUSIVENESS:
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HOW TO MAKE TRADE WORK FOR ALL

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Note

WTO members are frequently referred to as “countries”, although some members are not countries in the usual sense of the word but are officially
“customs territories”. The definition of geographical and other groupings in this report does not imply an expression of opinion by the WTO Secretariat
concerning the status of any country or territory, the delimitation of its frontiers, nor the rights and obligations of any WTO member in respect of
WTO agreements. There are no WTO definitions of “developed” and “developing” economies. Members announce for themselves whether they are
“developed” or “developing” economies. The references to developing and developed economies, as well as any other sub-categories of members used
in this report, are for statistical purposes only, and do not imply an expression of opinion by the Secretariat concerning the status of any country or
territory, the delimitation of its frontiers, nor the rights and obligations of any WTO member in respect of WTO agreements.

The data supplied in the World Trade Report 2024 are valid as of 1 September 2024.

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World Trade Report 2024
Over the past 30 years, the world has witnessed a period of
unprecedented income convergence, as the wide gap in income levels
between economies has narrowed. Economic growth has improved
living conditions and prospects for many people around the world.
However, not all individuals, regions and economies have benefited
equally from the changes brought about by more open trade.

The World Trade Report 2024 explores the complex interlinkages

between trade and inclusiveness across and within economies.
Openness to international trade can drive economic growth, but
many low- and middle-income economies struggle to diversify or
to integrate into world trade. Although trade supports numerous
jobs and provides access to affordable goods and services, some
individuals can face challenges in adapting to new economic
conditions following trade openness. However, trade protectionism
neither protects the overall economy, nor promotes inclusiveness
within economies.

Diversifying global value chains, reducing trade costs through

digitalization, and transitioning to a low-carbon economy can
create new opportunities for low- and middle-income economies.
Addressing remaining barriers to trade and investment, facilitating
the implementation of existing WTO agreements, and ensuring
that the WTO is fit for new challenges are crucial to support
inclusiveness across and within economies. Furthermore, trade
policies need to be complemented by domestic measures, such
as labour, education and competition policies, so that the gains
from trade can flow to workers and consumers, and so that those
individuals can move to benefit from those gains. WTO cooperation
with other international organizations can magnify combined action
on inclusiveness across and within economies.