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In recent decades, many developing countries – particularly in East Asia during the 1990s era of ‘hyper-globalisation’ – experienced unprecedented growth that economists have credited to trade openness and what Balassa (1971, 1988) termed “export-led growth” (e.g. Baldwin 2016, Goldberg and Reed 2023, World Bank 1993, 2020). However, the last decade has seen a decisive shift in globalisation driven by structural factors (technological advances including digitisation and automation, climate change impacts), policy changes (rising protectionism, industrial policy, climate responses), and geopolitical tensions, particularly US-China rivalry (Baldwin and Ruta 2025).
In our recent paper (Goldberg and Ruta 2025), we examine economic development prospects in this new global environment. We argue that, while trade will continue to support growth, replicating the export-led successes of the past appears increasingly unlikely, as two key mechanisms – access to lucrative advanced economy markets and cross-border knowledge sharing – are now under threat.
Dynamic channels: How trade fostered development
Economic theory over the years has identified several mechanisms through which trade promotes growth and raises real incomes. However, the trade–development nexus is characterised by a well-known and longstanding puzzle: standard trade models cannot explain the magnitude of growth observed in successful developing countries. Even models featuring intermediate inputs, monopolistic competition, and heterogeneous firms predict modest welfare gains compared to the extraordinary growth experienced by countries like South Korea.
This gap reveals a key insight: while static comparative advantages can deliver an initial income boost, the most consequential effects of trade on development operate through dynamic channels – processes that trigger structural transformations in endowments, technologies, and institutions that support long-term development.
Three dynamic mechanisms stand out.
- First, access to large foreign markets enabled firms to exploit scale economies and adopt modern technologies, with micro-level evidence showing that expansion into export markets allows firms to increase scale and adopt new technologies.
- Second, trade promoted technology-upgrading through multiple channels: learning by exporting and importing, quality upgrading that catalysed skill upgrading as exporters targeted high-income markets, and firm-to-firm knowledge spillovers within global value chains. The literature on global value chains, particularly from sociology, emphasises how firm-level interactions enable knowledge diffusion across borders.
- Third, trade agreements provided an anchor for institutional reform through enforceable rules in areas like investment, competition, and intellectual property rights, with evidence showing that these ‘deep’ provisions promote trade integration and growth.
What is different today?
Three conditions enabled these dynamic effects: structural factors like technological developments that allowed production fragmentation across national borders; liberal trade and industrial policies in advanced economies that provided access to large and lucrative markets; and relative geopolitical stability that prioritised economic efficiency over political concerns. Each of these conditions is now changing.
Structural shifts include new technological processes like automation and digitisation and the risks created by climate change.
Automation poses the most direct challenge to the traditional development pathway through low-skill manufacturing. While robot adoption remains concentrated in sectors like automotive, many labour-intensive industries critical for developing countries – textiles, garments, footwear – have high shares of potentially automatable jobs. For example, in the textile sector – a traditional entry point for developing countries into manufacturing – 64% of jobs are technically replaceable by robots, yet current robot adoption remains minimal at just 0.35 robots per million labour hours, compared to 10.8 robots per million labour hours in the already heavily automated automobile industry. The empirical evidence on the impact of automation on trade is so far mixed. Some studies find automation increases imports from developing countries through productivity and scale effects. Others document declining exports and reshoring, particularly when automation combines with perceived supply chain risks.
Digitisation presents a more promising picture, but its ultimate impact on the trade–development nexus is an open question. On the plus side, digitisation has reduced logistics and communication costs, accelerated trade facilitation, and enabled e-commerce – with particularly beneficial effects for developing countries in global value chains. Trade in services has expanded dramatically, growing robustly even through COVID-19. But can tradable services become the new engine of development? The challenge is that the fastest-growing service exports – professional, technical, IT services – are skill-intensive, creating a mismatch with developing countries’ comparative advantage. The sector also remains heavily protected by domestic regulations in advanced economies. Finally, a crucial question still with no answer is whether services trade can generate the same economy-wide transformation that manufacturing did in the past decades.
Climate change poses serious but heterogeneous challenges to developing countries’ export prospects, primarily through natural disasters rather than shifting comparative advantage. Contrary to common assumptions, recent research finds that the projected effects of climate change on agricultural productivity do not significantly reshape international trade patterns – the losses operate mainly through domestic reallocation rather than trade. However, the intensifying frequency and severity of climate-induced natural disasters presents a more serious threat: low-income countries face three times the disaster frequency per unit land area compared to high-income countries (as measured in 1980-2023) and exhibit substantially higher climate vulnerability. These disruptions threaten to deter future participation in global value chains, as firms may increasingly avoid locating production in climate-vulnerable regions – a dynamic already observed where automation-induced reshoring concentrates in countries perceived as less risky.
Policy shifts may pose more immediate challenges for developing economies’ trade prospects.
Between 2009 and 2023, industrial policies in advanced economies first increased at a pace comparable with developing economies and then accelerated from 2020. This marks a dramatic shift from the era of hyper-globalisation, when most advanced economies largely refrained from heavy intervention. The motives are diverse: strategic competitiveness, climate mitigation, national security concerns, or supply chain resilience. But the common thread is that advanced economies are using industrial policy tools at a higher rate than they once did.
This shift has profound implications for developing countries. Historical development successes – China, South Korea, Taiwan, Vietnam – combined industrial policy with access to foreign technology through cooperation with firms in advanced economies. For example, China’s ‘quid pro quo’ arrangements, which conditioned market access on technology sharing, facilitated rapid catch-up. Similarly, Chinese automakers in joint ventures experienced significant quality upgrades through labour mobility and supplier linkages with foreign partners. But today’s environment is fundamentally different. Recent US semiconductor policy, for instance, explicitly aims to reshore production rather than diversify it to foreign locations that would have lower costs. The changing calculus between national security and economic efficiency in advanced economies has thus direct implications for developing countries.
Meanwhile, industrial policies by large emerging markets create additional headwinds for other developing countries. Recent evidence shows that Chinese subsidies have boosted exports to developing countries more than to advanced economies, particularly in electrical machinery and automotive sectors. These measures simultaneously crowd out third-country exports through import substitution effects and by increasing competition in export markets. China’s shipbuilding subsidies, for instance, crowded out initially more efficient producers in Japan and South Korea, demonstrating how industrial policies in large emerging markets can target traditional sectors without clear economic externalities, creating negative spillovers for other economies.
Climate-motivated policies reinforce the constraints on developing countries while creating selective opportunities. The EU’s Carbon Border Adjustment Mechanism, scheduled to enter into force in 2026, will impose carbon tariffs on imports from countries with less stringent climate policies. Based on exposure indices that combine export shares to the EU with carbon intensity, countries like Zimbabwe, Mozambique, Egypt, and Cameroon emerge as the ones whose exports are going to be hit the hardest. Climate policies are also changing demand for critical minerals, such as those essential for batteries and renewable energy. Several developing countries that are rich in these critical minerals thus stand to benefit as a result of these policies. Yet, without technology transfers and industrial upgrading, critical mineral wealth is unlikely to be a catalyst for structural transformation and could risk becoming another resource curse.
Geopolitical shifts may be most consequential, as the return of great power rivalry marks a fundamental change in the global economic order, with serious implications for developing countries’ growth prospects.
Since 2018, escalating US-China tensions have triggered measurable trade fragmentation along geopolitical lines. China’s share in US imports fell by 8 percentage points between 2017 and 2023. Recent evidence suggests we may be witnessing fragmentation patterns comparable to the early Cold War: after Russia’s Ukraine invasion, trade growth between geopolitically aligned blocs (US-leaning versus China-leaning countries) dropped by 5 percentage points more than trade within blocs. While some middle-income ‘connector’ countries initially benefited from US-China trade diversion – Vietnam and Mexico increased exports to the US while importing more intermediates from China – this window may be closing rapidly with the new tariffs introduced by the US in 2025. Moreover, the countries that captured these opportunities were already well-integrated into global value chains, not the low-income economies that are currently at the margin of global markets.
More fundamentally, geoeconomic fragmentation directly threatens the two mechanisms that historically enabled export-led growth miracles: access to large, high-purchasing-power markets and cross-border technology transfer. Advanced economies are increasingly unlikely to absorb low-cost imports from developing countries, while national security concerns are shutting down the knowledge-sharing channels that once allowed countries like South Korea and Taiwan to climb the technology ladder. China’s large trade surpluses and declining import share suggest it is not replacing Western markets as an engine of developing-country exports, while foreign direct investment to emerging markets has declined from $731 billion in 2019 to $435 billion in 2023.
Perhaps most consequentially, geopolitical rivalry is undermining the rules-based multilateral system that once protected smaller economies from bilateral power asymmetries. The weakening of WTO disciplines and dispute settlement mechanisms leaves developing countries exposed to discriminatory treatment they cannot contest. As trade policy shifts from rules-based to power-based negotiations, developing countries lose the institutional safeguards – particularly most-favoured nation protections – that prevented large economies from exploiting their bargaining leverage. Unlike the policy changes and structural shifts discussed above, geopolitical rivalry carries the added risk of actual conflict and persistent uncertainty – conditions fundamentally incompatible with the long-term investments in technology, institutions, and human capital that development requires.
Policy implications
Structural changes like automation and climate pose challenges, but their effects remain limited and heterogeneous, unfolding gradually over time. Policy and geopolitical shifts present more immediate threats – sudden and dramatic changes that directly constrain the dynamic channels historically supporting development, namely, access to large lucrative markets and technology transfers. Absent meaningful reversals, the export-led growth miracles of recent decades reflected a unique historical moment that has ended. While trade will remain an important source of growth, developing countries now face a substantially more constrained environment where replicating past successes will be harder and more conditional on major powers’ strategic choices. Future development strategies will need greater emphasis on domestic reforms, regional partnerships, and human capital investment.
Authors’ note: The views expressed are those of the authors and do not necessarily represent the views of the institutions at which they work.
References
Atkin, D and A Khandelwal (2020), “How distortions alter the impacts of international trade in developing countries”, Annual Review of Economics 12(1): 213–238.
Atkin, D and D Donaldson (2022), “The role of trade in economic development”, in G Gopinath, E Helpman and K Rogoff (eds), Handbook of International Economics, Vol. 5, Elsevier.
Balassa, B (1971), “Trade policies in developing countries”, American Economic Review 61(2): 178–187.
Balassa, B (1988), “The lessons of East Asian development: An overview”, Economic Development and Cultural Change 36: S273–S290.
Baldwin, R (2016), The great convergence: Information technology and the new globalization, Harvard University Press.
Baldwin, R and M Ruta (eds) (2025), The State of Globalisation, CEPR Press.
Goldberg, P K and T Reed (2023), “Presidential address: Demand-side constraints in development. The role of market size, trade, and (in)equality”, Econometrica 91: 1915–1950.
Goldberg, P K and M Ruta (2025), “The Changing Nature of International Trade and its Implications for Development”, NBER Working Paper 34283, forthcoming in Handbook of Development Economics.
World Bank (1993), The East Asian miracle: Economic growth and public policy, Oxford University Press.
World Bank (2020), World Development Report 2020: Trading for development in the age of global value chains.