See afterwards: Heckscher-Ohlin Conference 2023 – building trade policy on contemporary science
During the past 20 years, trade economists have made important contributions to our understanding of international trade. However, the key insights of this research have not yet sufficiently reached the policy level.
To link contemporary research to modern policymaking, we organised the first Heckscher-Ohlin Conference in May. Researchers presented the state of knowledge in trade research. Decision-makers commented and discussed how trade policy could be more evidence-based.
The conference was organised by the National Board of Trade Sweden and the Center for Asian Studies at the Stockholm School of Economics. It was part of our support to the 2023 Swedish presidency of the Council of the European Union.
The conference was held 11 May 2023.
Watch the conference and read short interviews with some of the speakers
The need for evidence-based trade policy
Johan Forssell, Sweden's Minister for International Development Cooperation and Foreign Trade | See Forssell´s presentation
Research keynote address: 21st century trade research – what all policymakers should know
Marc Melitz, Professor of Political Economy at Harvard University | See Melitz´presentation
Interview with Marc Melitz (article)
Marc Melitz, you were the research keynote speaker. The purpose of the conference was to link trade policymaking more closely to 21st century trade research.
What would you say are the main policy insights from the current research agenda?
It is useful to start with the earlier wave of research pointing out that if you want to understand trade patterns you need to understand how those represent an aggregation of individual firm export decisions about what products to export where. Progressively, the research focused on additional firm decisions regarding their global operations to reach their customers around the world. Should firms own and operate their foreign distribution networks? How should product quality be adjusted for different foreign markets? How should production technology adapt to the scale of global operations?
One important set of decisions relates to the organisation of the firms’ global supply chains. To what extent should those supply chains be vertically integrated into a common ownership structure? What are the costs and benefits of exclusive supplier and multi-sourcing arrangements? And of course, where should those suppliers be located?
More recently, research has examined how those decisions are interconnected. If a firm configures its supply chain in a particular way, it will have repercussions for its scale of production and its incentives to serve certain foreign markets. When a firm has geographical knowledge of a particular region, it will also affect where it tends to sell its goods. So, there is a very strong interconnection between a firm’s supply chain and its foreign sale operations. And also with its choice of production technologies. Thus, innovation patterns are also affected by the nature and extent of a firm’s global production structure. As are decisions regarding automation.
The premise of the conference was that trade policy is increasingly disconnected from what we know about international trade and the effects of different types of trade reform. What can be done to close that gap?
One important implication is to understand how trade policy, even if it is meant to narrowly affect a given sector or specific trading partner, will often have global reverberations because of all those interconnected decisions that firms make in a global environment. The US-China trade war provided several examples of those reverberations.
But more generally, this type of conference and the ensuing dialogue will provide an excellent forum that will help to bridge those needed connections.
Swedish trade scholars Eli Heckscher and Bertil Ohlin are names associated with 20th century trade research. To what extent are their contributions to the field still relevant today?
If we think of Heckscher-Ohlin’s contribution as the very stylised model that is often used as a teaching tool (with two countries, two goods, and two factors of production) – then yes, that model has lost some relevance. But I would argue that the work by Eli Heckscher and Bertil Ohlin was much broader than that stylised model bearing their names. In fact, Ohlin made clear that he did not believe in a model where trade would equalise the returns to factors and would eliminate the incentives for specialisation. He thought about cases where there would be specialisation and important cost differences across countries. He also understood that the transformation of the raw factors of production into the final good involved a complex chain of production where outputs of one sector are inputs to the next.
Ohlin’s work was at the country level. Now we have moved to the firm level, but I would still argue that his ideas are still relevant, and his insights are still crucial.
Policy keynote address: Building trade policy on the shoulders of 21st century science
Anabel González, Deputy Director-General at the World Trade Organization | See González´ presentation
Interview with Anabel González (article)
Anabel González, you were the policy keynote speaker at the conference.
Many times, policymakers must balance between what they know to be true from research and political considerations. Whether the issue is climate or trade policies, this balancing act is perhaps more difficult than ever. As a policymaker from the most important global trade organisation, what is your advice for such situations?
My experience in national and global trade policy has taught me that political considerations will inevitably be front and centre in any trade policymaking process. Given that reality, the key challenge is ensuring that data and analysis play a greater role in shaping trade policies. My advice is to encourage both trade policymakers and researchers to talk more to each other.
Engaging with trade policymakers more systematically could help researchers improve their understanding of the political constraints under which policymakers operate and adjust their research questions accordingly. When the first-best is politically out of reach, research on second-best or even third-best options will be the most useful.
Greater interaction with trade policymakers will also allow researchers to tailor their work to the needs and realities of the policymaking cycle for greater impact. For example, in most trade negotiations that I have been part of, the need for data and analysis is greatest in the early stages when trade officials are trying to "frame" the policy problem at hand and develop a common understanding of how it can be tackled. By contrast, during the final stages of a trade negotiation there is often little, if any, room to make major course corrections in response to new data and analysis.
More regular and sustained engagement between policymakers and researchers will also help researchers develop a better sense of what works and what does not when communicating their findings to a trade policy audience. Researchers often have a very small window to capture the attention of trade policymakers, so they need to find ways of getting their main messages across clearly and succinctly. Sometimes a few powerful case studies could be very effective in bringing dry empirical work to life.
What trade-related research do you need more of in your role of Deputy Director-General at the World Trade Organization?
There are many research areas that require attention but let me highlight three.
First, services and digital trade. Digital technologies are driving new opportunities for exports and innovation in the services sector. Yet, research on the potential role of services trade, especially digitally delivered services trade, as a path to development is scarce, partly because most data collection efforts and frameworks for productivity and employment analysis have focused on the manufacturing sector. Trade policymakers would benefit significantly from high-quality analyses that improve our understanding of the contribution of services trade policies to climate change, female empowerment, agricultural productivity and other key sustainable development goals.
Second, subsidies and industrial policy. Subsidies have become an important source of trade tensions globally. We need to understand better how the effectiveness of subsidies can be improved, while limiting negative cross-border spillovers and political tensions.
Trade and climate change is a third area where I think researchers can make an important contribution. In last year’s World Trade Report, we found that despite much progress in the trade and climate research agenda over the past few years, there is still a lot we do not know. There is much room to fill data and analysis gaps to help trade policymakers, both at national and global levels, design more effective and efficient interventions to reduce the carbon footprint of trade, use opportunities to close material loops in global value chains and design and measure the effectiveness of different approaches to limiting carbon emissions, among other questions.
The impact of trade liberalisation on productivity
Claudia Steinwender, Professor of Economics at Ludwig Maximilian University, Munich | See Steinwender´s presentation
Commentator: Julia Nielson, Deputy Director of the OECD Trade and Agriculture Directorate | See Nielson´s presentation
The social dimension: trade and inequality in the light of 21st century theory and evidence
Pinelopi Koujianou Goldberg, Professor of Economics at Yale University | See Koujianou Goldberg´s presentation
Commentator: Cecilia Malmström, Senior Fellow at the Petersen Institute for International Economics | See Malmström´s presentation
Interview with Pinelopi Koujianou Goldberg (article)
Pinelopi Koujianou Goldberg, you were one of the research speakers at the conference.
The purpose of the conference was to link trade policymaking more closely to 21st century trade research. What would you say are the main policy insights from the current research agenda?
Broadly speaking, there are two main policy insights.
The first is that the distributional impacts of trade often manifest themselves as an increase in spatial inequality – that is inequality across different geographic regions with different degrees of exposure to international trade. This contrasts with the earlier focus on worker skill or industry affiliation as the relevant margins of distributional conflict, and has potentially important policy implications; for instance, it could provide a justification for place-based policies.
The second insight is that we need to take market imperfections and failures much more seriously. Stylised models based on perfectly competitive markets do not do justice to the complexity of 21st century trade. To give a few examples: Recent research has emphasised the importance of (large) firms in international trade that may have market power and make profits, generating incentives for strategic trade policy. Trade increasingly takes place in global value chains that magnify the effects of trade policy. There are potentially important externalities – both positive (e.g., knowledge transfer, learning-by-doing) that could provide a justification for industrial policy, and negative (environmental costs of shipping) that may lead to a more nuanced assessment of trade liberalisation. There are information and search frictions, both for firms that try to locate trade partners in other countries and for workers who try to locate jobs in their country, that could justify targeted subsidies. Last but not least, trade is particularly important to developing countries, and such countries often face a distinct set of challenges and distortions (e.g., monopsony power in agricultural markets, imperfect enforcement of regulations, lack of contract enforcement, corruption) that interact with trade reforms.
The premise of the conference was that trade policy is increasingly disconnected from what we know about international trade and the effects of trade reform. What can be done to close that gap?
First, practitioners, especially those who are strong advocates of free trade, have often been reluctant to publicly acknowledge what we already know, and to act accordingly. For instance, the fact that trade reform may cause disruption in the short run, and generate winners and losers in the long run, is an old insight – but one that is often downplayed when trade reform is enacted. So, my first suggestion would be for policymakers to take those insights to heart and to focus their efforts on transitions and adjustment and distributional impacts as much as on making the case for the efficiency gains resulting from trade liberalisation.
Second, it would be helpful to leverage the many advances in trade research. I mentioned some of them above, and there are many more.
Finally, we should also reverse the direction of the feedback. Policymakers can suggest areas of inquiry that have been understudied by researchers to date. Trade in services is an obvious such area. Service trade is the potential new frontier of globalisation, yet we do not even have a good way of measuring it.
Swedish trade scholars Eli Heckscher and Bertil Ohlin are names associated with 20th century trade research. To what extent are their contributions to the field still relevant today?
Heckscher and Ohlin made a fundamental and lasting contribution to international trade by providing a framework for understanding distributional conflict. When we teach international trade, we typically start with the Ricardian model in order to explain to students the concept of comparative advantage. But this model, with its emphasis on aggregate gains, does not explain why over centuries, there has been so much opposition to free trade. The Heckscher-Ohlin model fills this gap. Today, its insights are more relevant than ever as the distributional implications of trade have become a central focus of concern among academics, policymakers and the public.
There are of course limitations to the Heckscher-Ohlin model. It is highly stylised and based on strong assumptions, such as perfect competition, no externalities, no distortions other than trade protection. But all this has created an exciting research agenda that adds to the original contribution.
Interview with Cecilia Malmström (article and video)
Many times, policymakers must balance between what they know to be true from research and political considerations. Whether the issue is climate or trade policies, this balancing act is perhaps more difficult than ever.
As a former EU Commissioner and academic, what is your advice for such situations?
It is not always crystal clear what is a fact and what is an opinion, but you always have to balance. Every proposal from the European Commission is based on an impact assessment where we look at possible scientific research, but also consequences of the proposal.
With that in your background, you also have to listen to what is possible politically and try to balance. I always try to argue in favour of a proposal but based on as many facts as you could have of course.
And then you need to see what is politically feasible, but you can also change facts by political will. So, it is a tricky balance. But I think we need to try, to keep on trying.
What trade-related research did you lack as an EU commissioner for trade?
Well, at one point I actually lacked a lot of research about trade and gender. We saw that there were so many differences on how women and men benefited from international trade but there was so little research. We started to look at the different institutions, different academia and so on to call for more research on that. Because if you want to be more inclusive in trade, then you really need to have analysis and facts in order to see what needs to change.
This is what I lacked. There is much more coming now in the last years but at that moment when I start to realise that there were lots of differences, we actually lacked a lot of research.
This time it is different? Strategic trade policy in the new era
Patrik Tingvall, Chief Economist at the National Board of Trade Sweden | See Tingvall's presentation
Simon Evenett, Professor of International Trade and Economic Development at the University of St Gallen | See Evenett´s presentation
Trade and geography in an interconnected world: the globalisation and localisation of production networks in the 21st century
Henry Yeung, Distinguished Professor at the Department of Geography at the National University of Singapore | See Yeung´s presentation
An evidence-based approach to trade and development
Inu Manak, Fellow for Trade Policy at the Council on Foreign Relations, Washington, DC | See Manak´s presentation
Patrik Ström, Director at the Center for Asian Studies at the Stockholm School of Economics | See Ström´s concluding remarks
Interview with Patrik Ström
Patrik Ström, as a representative from the Stockholm School of Economics you were one of the organisers of the conference.
In your view, how well-informed about the modern trade research are policymakers?
I think this actually depends. In countries that have a tradition of engaging with free trade and open markets, policymakers are quite well-informed about research conducted. However, recently, arguments related to free trade have seen an increase of uniformed opinions, particularly among countries with large domestic markets. In the long run, this will naturally be a problem for increasing global economic growth through trade.
What is the role of academia in promoting research to policymakers?
I think the role of academia is twofold. First, research should provide science-based foundations for the development of policy. This is a way of counterbalancing more populist trade agendas. Second, academia can act as a platform and forum for discussion where business, public sector and policy come together in order to develop mutual understanding and share knowledge.
What trade research is still needed in order to give better policy response to today’s challenges?
In my opinion, there are two areas that are in need of research. First, the transition towards an economy where services are becoming a larger part is still rather under-researched. This relates to understanding implications for trade when more of the value-added is generated at the intersection of advanced manufacturing and services, not only in advanced economies, but rapidly also in developing economies. Second, there is still much to do in relation to research on global value chains or global production networks and how the configuration in space impacts trade patterns.