International Trade: Issue 2

Developing countries are characterised by weak institutions, market failures and distortions. While recent decades have seen substantial progress in our understanding of how these frictions interact with international trade, significant and policy-relevant gaps remain. We believe that this intersection of trade and development is a ripe area for future work.

To date, much of the work in trade and development relies on administrative datasets. While this data is valuable for understanding general patterns across a range of sectors, they have two limitations of particular relevance for developing countries. First, data on the type and size of the economic distortions that we argue are key to understanding the impacts of trade in developing countries—e.g. enforcement of regulations, contract structures, credit constraints, or political connections—are either unavailable or challenging to extract from administrative datasets. Second, much economic activity remains in the informal sector that is not easily captured through administrative data making it difficult to know whether the aggregate economy is becoming more or less distorted through trade.

We see two particularly fruitful avenues for progress. The first is to combine multiple sources and types of data—including leveraging advances in digitisation, tracking technologies and text analysis—to provide a more complete understanding of the effects of trade in the developing world. The second and complementary approach is to focus on specific industries where tailored firm surveys and niche datasets can overcome at least some of these important measurement concerns. But as this review argues, crucial to either approach is data that captures the institutional complexities, market failures and distortions of the particular setting. 

There are also new sets of questions, and older questions that need revisiting. Most prominently, geopolitical headwinds are moving supply chains away from China while the desire for supply chain resilience is leading firms to diversify their sourcing. In addition, Europe and others are incorporating environmental requirements into their trade policies. Understanding how developing countries can benefit rather than lose from these changes is a critical question.