By Era Dabla-Norris and Romain Duval
Weak productivity growth in many advanced and emerging market economies in the wake of the global financial crisis is raising concerns about future growth prospects. New research indicates that easing barriers to international trade and foreign direct investment (FDI) could boost productivity and output.
Efforts to lower trade barriers have been stalling, but a push toward new agreements promises to reverse the trend. The recent Trans-Pacific Partnership (TPP) agreement between the United States, Japan, and 10 other Pacific Rim countries, along with the ongoing negotiations between the U.S. and Europe on the Transatlantic Trade and Investment Partnership (TTIP), place productivity and growth high on policymakers’ agendas.
Past multilateral trade liberalization rounds have helped boost productivity, so these recent agreements—albeit not global—could do the same, given their broad geographic coverage, both as a percentage of total world GDP and total world trade. Policymakers, however, need to be mindful of the distributional effects of open trade and take steps to mitigate the impact on those displaced to realize the full potential of lower trade barriers on productivity and economic well-being.
As shown below in Chart 1, even in advanced economies, which have already liberalized tariffs in the past, further reductions in nontariff/regulatory barriers to trade and FDI offer scope for additional productivity gains.
