As the world’s financial elite converges on Washington, DC, for the annual meetings of the International Monetary Fund and the World Bank, they cannot escape yet another clarion call to reverse the retreat of globalization. Faltering trade, it is assumed, must be an adverse trend that needs to be addressed. But the assumption is simplistic, at best.

The problem lies in a lack of understanding of what drove trade growth over the last few decades. To be sure, there have been efforts to grasp the current slowdown. The IMF’s latest World Economic Outlook devotes an entire chapter to it.

But no significant new barriers to trade have been identified. Instead, the IMF declares, some three-quarters of the slowdown in trade growth is a result of “overall weakness in economic activity,” especially investment. The Fund also asserts that “the waning pace of trade liberalization and the recent uptick in protectionism” have played a role, though it is not quantifiable.

Even without establishing a clear understanding of what is driving current trends, however, the IMF report calls for action to revive the “virtuous cycle of trade and growth.” Clearly, faith in trade is very strong.

But faith is part of the problem. Blind faith in globalization led many to overhype it, creating impossible expectations for trade liberalization. When those expectations were not met, many people felt duped and rejected free trade.

This is not to say that there is no empirical case for trade liberalization. Dismantling trade barriers enables countries to start specializing in sectors in which they are more productive, which leads to higher growth and living standards for everyone. And, indeed, from the 1950s to the 1980s, the process of breaking down the high trade barriers that had been erected during World War II brought major gains.

But these gains petered out eventually. Economic theory implies that the gains from reducing trade barriers decline faster as those barriers become lower. So it should not have been surprising that, by the early 1990s, when tariffs and other trade barriers had already reached very low levels, the traditional benefits of trade liberalization had largely been exhausted. Eliminating what small barriers remained would not have had much impact.

What did have an impact was a two-decade-long commodity-price boom. High prices enabled major commodity exporters to import more and to pursue growth-enhancing policies at home – a boon to global growth. Moreover, because commodities account for a large share of world trade, rising prices boosted its total value.

Rather than acknowledge the role of commodity prices in bolstering both trade and growth in the early 2000s, most economists and politicians attributed those positive trends to trade-liberalization policies. In doing so, they reinforced the notion that “hyper-globalization” was the key to huge gains for everyone.
But the growth fueled by higher commodity prices, unlike that produced by the dismantling of trade barriers, caused a decline in living standards in the commodity-importing advanced countries, because it reduced the purchasing power of workers. No politician dared to make this distinction. So when advanced-country workers were squeezed economically, they concluded that globalization was the problem.

The role of commodities in the recent struggles of advanced-country workers is reflected in the differences between the experiences of those in the United States and Europe. Because the US produces much of its own oil and gas, the increase in commodity prices had less of an impact on the economy as a whole than in Europe.