World Trade, Growth, and Income: Globalisation and Sustainability Can Go Hand in Hand

Germany is a winner of globalisation. Open borders offer opportunities for other countries, too – not only for greater prosperity, but also for a more sustainable development. Globalisation and sustainability are not opposites. But designing a framework for the global economy remains a global governance challenge.

Germany is a winner of globalisation

Hardly any other economy is as globalised as Germany. Almost one in every four jobs depends on exports, in the manufacturing sector it is every second job. Germany’s export ratio is about 48 percent, meaning that almost half its GDP is earned abroad. Germany’s stock of almost one billion euros of foreign direct investment also reflects its central position in the global economy. The turnover generated by these foreign investments is roughly double the value of German exports.

Germany’s economy and society greatly benefit from their international orientation. A study by the Bertelsmann Foundation shows that growing global interdependence boosted German GDP by about €100 billion in real terms each year between 1990 and 2011. Why is that the case? Today, we source goods and services from all over the world. This expands our choice. Market opportunities grow, and specialisation becomes more worthwhile for businesses and workers alike. Today, many small and medium-sized German businesses also serve global markets. And globalisation has led to an internationalisation of production processes. Organising production internationally has significantly changed the German economy. In some sectors and professions, this has proven to be a difficult process. But it has made the German economy as a whole more competitive and successful. Global economic connectivity is one of the most important strategies behind Germany’s economic success.

Global gains from open markets

Germany is a winner of globalisation. But are open markets good for other countries, too? What are the effects on the global economy? The world has grown closer economically since the fall of the Iron Curtain in the early 1990s. Borders were opened, and companies have steadily developed foreign markets. According to UNCTAD, trade increased about fivefold between 1990 and 2014, while stocks of FDI grew roughly tenfold. During the same period, global GDP – and thus global income – has more than tripled (338.2 percent), putting it far ahead of global population growth (36.8 percent). That allowed global per capita income to grow by 247.2 percent (UNCTAD) in the course of the trade liberalisations between 1990 and 2014.

Globalisation: Prosperity growth worldwide

Global population, world production, trade and FDI stocks (1990 = 100) and global per capita income

Globalisation and the State’s responsibility

Does everyone really benefit from trade liberalisation? Has the example of the North American Free Trade Agreement (NAFTA) not demonstrated that trade agreements can also be detrimental for ordinary people? The high expectations expressed when NAFTA was signed in the early 1990s have certainly not all been fulfilled. Globalisation has also exposed Mexico, as the weakest of the three NAFTA economies, to direct competition from low-wage Asian economies. But trade and direct investment in the NAFTA area have grown considerably since 1994. Furthermore, Mexico’s per capita income has almost tripled since the agreement was signed, while the number of people living in extreme poverty (under $1.25/day) has fallen to roughly one quarter. At the same time, income inequality has decreased slightly, indicating that the social systems also contribute to this development.

Although globalisation promotes prosperity worldwide, poverty still exists. Wealth has not trickled down everywhere. That is not an argument for less globalisation, but for greater efforts in global governance and social policy on the national level.

Globalisation and sustainability are not mutually exclusive

Open borders allow us to cooperate with larger numbers of people. More opportunities for exchange mean lower production costs and less resource consumption for production. According to the OECD, the energy intensity of production (the amount of energy required per unit of GDP) fell significantly between 1990 and 2014. While we owe this positive development largely to modern production technologies, world trade also played a role. According to the Frazer Institute (2015), the production of goods and services uses least energy where the freedom of trade is relatively high. Globalisation and sustainability are not mutually exclusive.

Globalisation: Steadily falling energy use in production

Global population, production, trade and FDI stocks (1990 = 100) and energy consumption per unit of production

Source: UNCTAD, GDP per capital, total population, FDI outward stock, total merchandise trade (accessed 23 August 2016). Tonnes of oil equivalent (toe) required for production: OECD Factbook 2015-2016 (accessed 24 August 2016)

Furthermore, open borders also facilitate international dissemination of the kind of high environmental and social standards that apply in Germany. Customers and international businesses increasingly expect Western standards – for example labour protection – to apply in less developed countries, too. Through investment and cooperation, foreign business partners may also learn how meeting minimum standards can contribute to business success.

Global governance needed

High environmental and social standards need to be promoted internationally, along with global trade in environmental technologies. Multilateral fora like the World Trade Organisation (WTO) and the G20 need to step up. Germany’s G20 Presidency in 2017 will offer politicians and civil society opportunities to make globalisation work for everybody.

Globalisation and sustainability: Open borders save resources

Freedom of trade (index 1 to 10) and energy consumption per $1,000 of GDP (tonnes of oil equivalent, toe)

Source: Frazer Institute, Economic Freedom of the World Report 2015 (accessed 24 August 2016). Tonnes of oil equivalent (toe) required for production worth $1,000: OECD Factbook 2015-2016 (accessed 24 August 2016)