Increased Trade: A Key to Improving Productivity

Global trade growth slowed abruptly after 2010, following decades of expansion. Annual world merchandise trade growth stayed below 3 percent for the fourth consecutive year in 2015. As global trade has slowed, the growth rate of productivity—defined as output per hour worked—is declining worldwide, markedly since the global financial crisis in most advanced countries and many emerging-market economies. This Policy Brief examines the possibility that reduced volumes of trade have impeded growth in productivity because of diminished competition in national economies and the shrinking role of comparative advantage. Although factors other than trade—notably physical and human capital accumulation and path-breaking innovations—also drive productivity, the negative contribution of sluggish trade growth is significant. The authors calculate that if US two-way trade had grown at its historical annual rate of 5.86 percent between 2011 and 2014, annual US productivity growth would have been substantially higher than what it was over those four years. The historical growth rate in trade would have delivered a $74 billion increase in US GDP through supply-side efficiencies in 2014. The next US president should view renewed trade liberalization as essential to enhancing productivity and spurring economic growth in the decade ahead.