Free trade may not be the panacea for global growth that its supporters contend it is, economists at an International Monetary Fund panel presentation said.
The era of rapid growth in trade fueling global GDP growth is likely over, Nobel Prize-winning economist Paul Krugman said at the IMF event in Washington, D.C., on Oct. 11.
Economic models suggest that, while trade liberalization gives a "one-time benefit," it is less clear whether the benefit will have long-term effects, Krugman said.
Dani Rodrik, a Harvard University economics professor, agreed that the period of "strong trade growth" is likely over. Some of that is due to secular changes, as global demand moves away from goods to services, he said.
The panelists noted that the assumption that trade liberalization would automatically result in development was not necessarily supported by the historic record.
Using Mexico as an example, Krugman said that while it changed from a country dependent on natural resource exports and tourism to a manufacturing economy, it still did not have the kind of GDP growth that was seen in other regions that liberalized trade.
Asian countries such as China and Vietnam were more successful at shielding domestic employment while they transitioned toward export economies, Rodrik noted. The result was that they reaped more benefit from trade liberalization, he contended.
Central bankers can also have a salutary effect on globalization and trade if they err on the side of generating employment and concern themselves less with issues like inflation, Rodrik said.
London School of Economics professor Keyu Jin expressed concerns about the China growth story. Because China targeted strategic sectors and firms, it introduced a "massive number of sectors," which has left excess capacity in sectors like coal, steel and iron; created zombie companies; and heightened the risk of default, she said.
The economists said they didn't expect the surge in calls for protectionism, most notably by the administration of President Donald Trump, to affect the situation in global trade.
"When Trump took over, I said I didn't think we would see fundamental change; his bark will prove a lot worse than his bite," Rodrik said. "I still believe it's true, despite all the talk."
The U.S. is currently renegotiating the North American Free Trade Agreement with Mexico and Canada and Trump has threatened to walk out if U.S. goals of protecting domestic jobs and American-made goods aren't met.