Forum

One of the many fascinating facts that you see in Economic History and Modern India: Redefining the Link by Tirthankar Roy (Journal of Economic Perspectives, Summer 2002) is about India’s trade/GDP ratio. The trade/GDP ratio rose dramatically from 1 to 2 per cent in 1800 to 20 per cent in 1914.

By 1970, the trade/GDP ratio had dropped to 8 per cent. It was only in the mid 1990s, the trade/GDP ratio had got back to
the 20 per cent value seen in 1914.

Most people in India today are not aware of the pre-War world, where goods and services flowed freely across the boundary, when
people in India diversified their portfolios across the globe, travelled freely within the British Empire, etc.

After the War, there was a big push worldwide to reduce trade barriers. Governments, then, made the call that agriculture was not
worth fighting for (since it was a fading share of world GDP but a large number of votes), and focused on manufacturing. By and large,
this worked. Trade in manufacturing is pretty free worldwide.

But world GDP shifted away from manufacturing. Today, world GDP is dominated by services. World GDP is now 5.8% agriculture, 30.8% manufacturing and 63.4% services.

Crudely speaking, if we have full free trade in goods, but zero trade in agriculture or services, then 69% of World GDP is submerged
in autarky.

Over the last 20 years, manufacturing trade liberalisation has continued, but the share of services in world GDP has risen. I suspect
that overall, this has made the world less hospitable to trade.

An interesting article on voxEU by Sebastien Miroudot, Jehan Sauvage and Ben Shepherd points out that in the aggregate, the costs of trade have dropped sharply for goods from 1995 onwards, but not for services.

We need to work harder on removing a variety of barriers to trade in goods. But we need to work much harder on removing the barriers to trade in services.

In this sense, the globalisation project is far from done. By and large, the world has done well on removing barriers to the movement of goods and capital (though India is as yet a laggard on both fronts). The two great frontiers are now trade in services and the movement of people. Given the huge footprint of services in world GDP, it is not even the case that we are exposing the world economy to as much global competition as was the case a few decades ago, when manufacturing was a big part of world trade and there was a lot of trade in it.

Read original blog post