In new research, Pinelopi Goldberg and Michele Ruta analyze how today’s structural, policy, and geopolitical trade conditions are no longer conducive to the trade-led growth miracles many developing countries experienced in the past.
For decades, international trade served as a central engine of development. Countries like South Korea, Taiwan, and, later, China leveraged access to foreign markets and integration into global value chains (GVCs) to specialize in specific tasks along the global production process and ultimately transform their economies. The combination of scale, technology diffusion, and institutional upgrading delivered growth far larger than what standard trade models predicted possible.
Can today’s developing countries replicate those trajectories? Our assessment is that the answer is probably not. Trade will remain a critical source of growth, but the structural, policy, and geopolitical conditions that enabled past “trade-led miracles” have fundamentally changed. As these conditions shift, the pathways for development available to low- and middle-income countries are narrowing.
How trade once delivered development gains
Traditional static trade models—focused on comparative advantage—cannot account for the magnitude of past episodes of growth in emerging markets. Their predictions expect only modest gains from trade, which is in sharp contrast to the actual large increases in income observed in the East Asian hyper-globalization success stories. Instead of relying on comparative advantages in cheaper labor or natural resources, what mattered instead were dynamic channels triggered by integration into global markets that enabled a structural transformation of the economy.
Three mechanisms were central:
1.) Scale. Access to rich-country markets allowed firms to grow, exploit scale economies, and invest in modern technologies. Evidence across numerous settings shows that the growth of manufacturing exports was often the catalyst for broader economic growth.
2.) Technology diffusion and skills upgrading. Firms learned through trade: they upgraded quality and skills to meet high-income consumer standards, and they benefited from knowledge spillovers via multinational–supplier relationships. GVCs served as conduits for managerial practices, production techniques, and organizational know-how.
3.) Institutional upgrading. Deep provisions in trade agreements—on competition policy, intellectual property, or investor protections—helped lock in domestic reforms and reduce policy uncertainty.
In turn, these mechanisms were enabled by three conditions: (i) technologies that reduced transportation and communication costs and allowed production to fragment across borders; (ii) liberal trade policies in advanced economies that granted market access; and (iii) a geopolitical environment that prioritized efficiency and cooperation over rivalry. All three mechanisms are eroding.
Structural shifts: automation, digitization, and climate stress
There are several structural changes that are reducing the availability of the mechanisms that enabled East Asia to rapidly develop from low-income status.
Automation poses the most direct challenge to labor-intensive manufacturing—the traditional entry point for low-income countries. Sectors such as textiles, apparel, and footwear remain only partially automated today, but a large share of tasks in these industries are technically automatable. Whether automation leads developed nations to reshore factories or expands trade through productivity gains remains debated, but the uncertainty itself makes global manufacturers more cautious about locating production in high-risk environments.
Digitization offers new paths but with significant constraints. For example, the growth of tradable services could—in principle—benefit developing economies. Yet, skill-intensive services such as IT, professional, and technical services dominate the fastest-growing segments of global trade, creating a mismatch for countries with large pools of low-skill labor. Moreover, services markets in advanced economies remain heavily regulated and relatively closed. Whether services can replicate the broad-based transformation historically generated by manufacturing remains unclear.
Lastly, climate change introduces additional headwinds, mainly through natural disasters and climate-induced disruptions rather than changes in comparative advantage per se. Low-income countries already experience disaster frequencies roughly three times higher (per unit of land area) than high-income economies. These risks may discourage multinationals from embedding vulnerable locations into their supply chains, especially when automation and geopolitical considerations already push production toward “safer” locations.
Policy shifts: the return of economic nationalism and industrial policy
In addition to technological and ecological structural changes, the resurgence of economic nationalism and industrial policy, especially in advanced economies, is hampering pathways to trade-led growth. Motivations vary—supply chain resilience, national security, climate mitigation—but the cumulative effect is a shift in the use of industrial policies around 2020.
The United States, China, and the European Union are the most important actors whose recent policy shifts have upended the possibilities of growth for developing countries.
Policies such as the United States CHIPS Act explicitly aim to reshore production rather than diversify it to lower-cost developing economies. Security concerns reduce the willingness of frontier firms to share technology or embed suppliers in sensitive value chains. The consequence is the reduction of access to markets and knowledge for developing countries.
China’s industrial subsidies have increased its export presence in many developing markets, often crowding out third-country producers in sectors like machinery. These spillovers raise formidable barriers for low-income economies whose firms lack comparable state support.
Meanwhile, the European Union’s Carbon Border Adjustment Mechanism (CBAM) will impose carbon tariffs on exporters with high emissions intensity, disproportionately affecting low-income economies. At the same time, rising demand for critical minerals offers selective opportunities. However, without technology transfers or local processing capacity, mineral abundance risks reinforcing a resource-dependent equilibrium rather than enabling structural transformation.
Geopolitical shifts: the rise of rivalries
Mostly consequential to new trade patterns, and related to the rise in economic nationalism, is the complication of tenser geopolitical relations. China’s share of U.S. imports fell sharply after the 2018-19 tariff tensions, demonstrating how trade flows increasingly correlate with geopolitical alignment. After Russia’s invasion of Ukraine, trade between opposing blocs (U.S.-leaning versus Russia-leaning countries) grew five percentage points more slowly than trade within blocs—a pattern reminiscent of the early Cold War.
Fragmentation undermines the two core mechanisms behind past growth miracles: access to large markets and cross-border knowledge transfer. Advanced economies are increasingly unlikely to absorb low-cost imports, while national security concerns are shutting down knowledge-sharing channels. China’s large trade surpluses and declining import share suggest it cannot replace Western markets as an engine of developing-country exports.
The weakening of the World Trade Organization’s rules and dispute-settlement system—a byproduct of growing geopolitical rivalries—compounds the problem. In a world where trade policy is increasingly power-based rather than rules-based, developing countries lose institutional protections that previously shielded them from discriminatory treatment.
What this means for development strategy
Automation and climate change present gradual yet durable challenges. By contrast, policy and geopolitical shifts are immediate and capricious: they increase policy uncertainty and strike at the heart of the dynamic channels—market access and knowledge diffusion—that made trade-led growth so potent.
Absent significant reversals, the large-scale growth miracles of the late 20th century reflected a historically specific window, one unlikely to reopen soon. Trade will remain an important engine of development, but it will operate under tighter constraints, and the pathways available to today’s low- and middle-income countries will be narrower and more uncertain.
This new environment calls for development strategies that place greater weight on: domestic institutional and regulatory reforms, regional integration, and human capital investment and skills upgrading.
Author Disclosure: The author reports no conflicts of interest. You can read our disclosure policy here.
Articles represent the opinions of their writers, not necessarily those of the University of Chicago, the Booth School of Business, or its faculty.
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