In our blog posts, we deal extensively with the current situation of world trade as well as its opportunities and risks. But how might global trade develop in the future? This article takes a look into the crystal ball.
What are the key drivers of international trade?
The extent of the international division of labor is determined by many factors. Three play a central role (see Figure 1):
- Endowment of the country with factors of production: The more units a country has of a certain factor of production, the cheaper that factor is in the country. A low factor price means that the country has an international competitive advantage with the corresponding production factor.
- Technological progress: Countries with a relatively small labor force have a strong incentive to develop labor-saving technologies and to advance digitalization. This reduces the costs of international trade, leading to an increase in economic globalization. At the same time, globalization is increasing competitive pressure – and inevitably, the need to push technological progress in order to survive in international competition.
- Political and legal framework: Whether a cross-border exchange of goods, services, technologies, and factors of production takes place depends not only on costs, but also on legal regulations. In recent decades, numerous tariffs and other trade restrictions have been dismantled worldwide. This has intensified cross-border trade.
How can the current state of the international division of labor be described?
The current state of the international division of labor and the resulting trade depends on the countries’ resources. Basically, it can be said:
- Countries with a large labor force, such as China and India, specialize in the production of products that require a lot of labor.
- Capital– and technology–rich countries such as Germany, Japan and the U.S. concentrate on the manufacture of products that require a lot of capital and technology for their production.
- Countries rich in land and natural resources such as Brazil and Russia specialize in corresponding products.
Outsourcing and offshoring are an important part of this international division of labor. This means that high-wage countries such as Germany, Japan, and the U.S. relocate labor-intensive production processes to low-wage countries.
Looking at the political and legal framework of world trade, the following is a rough overview: While the restrictions on the international exchange of industrial goods and capital are relatively low, the restrictions on the cross-border exchange of agricultural products and labor are higher (see Figure 2).
What effects do globalization and digitalization have on people?
Basically, it can be said: Globalization and technological progress have so far increased material prosperity in all participating economies, measured by gross domestic product (GDP). This is positive for citizens because higher material prosperity is the basis for higher immaterial prosperity (better educational opportunities, higher life expectancy, etc.).
Within an economy, however, the international division of labor and technological progress also led to a decline in employment and income opportunities for certain groups of people. In developed industrial economies, these are mainly low-skilled workers. To protect these individuals, industrial nations are increasingly resorting to protectionist measures. This puts international trade under pressure.
What could international trade look like in the future?
Industrialized countries have already largely benefited from the advantages of the global markets with the level of world market openings reached in the present day. Further market openings are now more interesting for emerging and developing countries. This applies to agricultural markets and even more to labor markets. Even in the areas of capital and technology-intensive products, industrialized countries are threatened with a loss of international competitiveness. The reason for this is the technological catching-up of the emerging markets, especially in Asia.
On the basis of these considerations, I see three fundamental developments for structuring global trade in the future (see Figure 3):
- The interest of developed industrialized countries in global free trade agreements is likely to be limited because competition with low-wage economies increases the pressure on labor markets in industrialized nations. Industrialized countries are therefore more interested in regional free trade agreements with other developed economies – such as the free trade agreement between the EU and Japan.
- Worldwide, production processes are becoming increasingly capital and technology-intensive. As a result, shifting production processes to low-wage countries is becoming less important. The trend towards reshoring, which is already evident, is likely to increase. The spread of 3D printing technology is accelerating this development. Rising energy prices (e.g. due to the introduction of CO2 taxes) will continue to promote this development because transport costs will rise as a result. Overall, production is moving closer to the sales markets.
- Even if production takes place in the future more closely to the sales markets, enterprises can continue to sell their products abroad. For this purpose, however, they must set up production facilities abroad, i.e. make investments there. This means that capital flows gain in importance in perspective, while trade flows lose in importance.
Even if the interest of the developed industrial countries in expanding international trade declines, this should not lead to economic isolation. The global exchange of goods, services, technologies and capital will continue to be a cornerstone of people’s material prosperity. Davos would be a very appropriate place to share and strengthen this belief.