University of Cambridge Lecture on World Trade, Development and Sustainability by Dr. Ngozi Okonjo-Iweala

Dr. Ngozi Okonjo-Iweala delivered the third University of Cambridge Lecture on World Trade, Development and Sustainability, sponsored, among other institutions, by the Centre for Inclusive Trade Policy. Building on her extensive experience as a development economist at the World Bank and her two terms as Nigeria’s Minister of Finance, the newly appointed WTO Director-General provided a compelling lecture. She emphasised the potential of international trade to promote global well-being and act as a catalyst for achieving a sustainable world.

This blog summarises the two core themes of her lecture: the relationship between international trade and development and the link between international trade and sustainability. It also suggests directions for future research to tackle some of the outstanding challenges in achieving global sustainable development.

The advantages from international trade have outweighed the disadvantages, especially in the context of the developing world. A particularly notable statistic is that from 1995 to 2020 low- and middle-income countries experienced an average cumulative GDP per capita growth of 140%. Also, without accounting for China, the proportion of people living below subsistence levels in these countries fell from 36% to 14%. Although not all of this can be attributed to trade, these countries did increase their participation in global supply chains from 17% to 32% over the same time period. While not all countries have participated equally in global supply chains and within-country is rising in certain places, these figures underscore why Dr. Okonjo-Iweala emphasised that trade has been largely beneficial for development.

Turning to current and future challenges, such as the green transition. More international specialisation is often associated with increased transportation, leading to higher emissions. However, two key arguments support the role of international trade in the green transition. First, transitioning to green technologies involves significant fixed and sunk costs, and many technologies benefit from learning-by-doing externalities as trial and error is inevitable when adopting new innovations. Here, international trade plays a crucial role by allowing firms to access a broader range of markets, making it easier to distribute and recover the costs of these investments. Second, international trade not only encompasses the exchange of goods and services but also includes the movement of people and ideas across borders. This exchange is vital for the widespread adoption of the most efficient technologies by facilitating the flow of knowledge and expertise. As Nobel Prize winner, Michael Spence suggests, we should continue to import what the world knows and export what the world wants.

There are at least two areas that present outstanding challenges and possible avenues for future research. First, Dr. Okonjo-Iweala advocated for re-globalisation in the face of current anti-globalist sentiments. This conviction is not only supported by the data mentioned earlier but also aligns with fundamental economic principles. That is, at the very least, opening up to trade unlocks consumption levels that would have been unattainable if a country had only relied on its own inputs, i.e. its own labour force, capital and know-how. Moreover, if trade facilitates the flow of ideas and knowledge, trade can even expand a country’s knowhow and make it more productive. Despite this, significant trade frictions still exist beyond tariffs and transportation costs, hindering fully free trade. For instance, in a recent study with Frank Verboven we compare market integration in the EU to that in the US. Even though all trade-policy barriers, e.g. import tariffs, quotas, etc., have been outlawed in the European Union, our findings reveal that price and product availability differences are much larger between EU countries than within them. In contrast, in the US, such differences between and within states are very comparable. These disparities suggest the presence of variable costs, such as having to change product labels to accommodate country-specific requirement, and fixed trade costs, like investing in cross-border distribution networks between EU countries, indicating more market fragmentation. Yet, we have not been able to relate these costs to deeper institutional, cultural, or political explanations. As the European Commission’s Draghi report recently highlighted, continued market fragmentation exerts a significant drag on living standards in Europe, better understanding the underlying drivers remains crucial to unlocking the full potential of international trade.

A second opportunity lies in reforming the international regulatory framework to accelerate the green transition. For instance, in her speech Dr. Okonjo-Iweala noted that public procurement accounts for approximately 15% of global procurement, presenting a significant opportunity to stimulate demand for green investments. Shapiro highlights that the US tariff schedule is biased against clean inputs, particularly because tariffs are higher for goods in downstream production stages.

The WTO suggests that this bias is widespread and that rebalancing tariffs from a negative to a positive bias could incentivise green investments. Another major challenge lies in ensuring that countries are motivated to impose these measures without relying on others to bear the burden. For instance, to combat carbon leakage, i.e., the relocation of activity to avoid being subject to carbon taxes or an emission trading scheme, carbon border adjustment taxes are often imposed. While they make carbon leakage less appealing, Ahmad Lashkaripour presented a study at the 2024 CITP Annual Conference that argues that carbon border taxes may be ineffective in reducing emissions.1 This is because they do not target emissions from non-traded goods and incentivise carbon-intensive firms less to adopt cleaner practices. However, they demonstrate that trade taxes can be used as a stick to encourage countries to join a climate club, where members agree to a common carbon pricing framework.

Future research should focus on understanding how firms adapt to international environmental regulations and whether both small and large firms are able to cope with the revamped regulatory framework. While this last aspect is key if we want to take full advantage of the creative destruction that the green transition brings, it seems relatively understudied.

Footnotes

1. The study presented was Farrokhi and Lashkaripour (2024).