Principles of International Trade (Import-Export): The First Step Toward Globalization

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Gallen, who manages the GTA on a day-to-day basis as well as undertaking strategic projects. Overall responsibility for the project falls to Professor Simon Evenett, again based at the University of St. In recent years, the GTA has been almost entirely funded by resources associated with the University of St. Given that G20 leaders made their pledge to eschew protectionism in November , policy announcements and interventions from 1 November are considered for inclusion in the dataset. After that start date, whenever new relevant information becomes available, the GTA team updates its database.

In practical terms, this means that, for example, if in information about a policy intervention in came to light, then the GTA team will document that earlier intervention so as to expand the information available about government policy choice throughout the entire crisis era. Facilitating this country coverage is the large number of languages that the GTA team members can read between them.

Still, there is likely to be better coverage of nations that are members of the G20 more generally of countries with larger GDPs , countries whose governments make more information available online, and where traditions of transparent government are strongest. Turning now to the contents of the GTA database, an entry refers to one or more policy interventions announced at the same time by a government body. Such an announcement may involve a change to a single tariff and therefore one policy intervention or could refer to a national budget speech where dozens of policy interventions are mentioned.

Each announcement is summarized on a separate page on the GTA website, www. The information collected for each announcement includes the identity of the implementing jurisdiction, the date of the announcement, sources preferably official sources related to the announcement, the form of each policy intervention contained in the announcement, 42 the date of implementation of each policy intervention if available , where relevant the date that each policy intervention will expire, where relevant the product 43 or sector 44 affected by the policy intervention should it be implemented, and enough information to describe the announcement and each policy intervention and to propose a color coding for the measure.

Once this information has been collected and depending on the commercial flow affected goods, services, FDI, migration; and inbound versus outbound , then available data on the relevant cross-border commercial flow is used to conservatively identify the trading partners almost certainly affected by the implementation of a given policy intervention.

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Each database submission is reviewed by two senior members of the GTA team. Only when both are satisfied is a measure published on the GTA website and included in the database. Each time an announcement is published, the GTA database is updated as are the statistics presented on the website.

Coding errors are reduced through training and, wherever possible, reducing the potential for human computational errors such as using existing trade flow data to automatically, rather than manually, identify affected trading partners. Periodically, further checks are commissioned from third parties to look for errors in published reports.

Since monitoring commenced in June , the GTA team has built up a library of websites of government agencies, 51 ministries, and gazettes official journals and of international organizations 52 that are consulted on a regular basis. However, the GTA team scours newspapers, reports by industry associations and law firms for leads of government policy intervention. Once a lead is identified, a team member investigates it and the goal is to find an official source to support any write-up. Increasingly, website scraping tools are being used to identify potential changes in government policy.

At the time the data was prepared for this paper, the GTA database contained information on 18, policy interventions, 54 17, of which have been implemented. The GTA has established itself as a credible source of information about crisis-era policy changes.

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Academic articles published in the leading journals of international trade law 56 and international economics 57 have made reference to or use of GTA evidence. Given the inherently cautious nature of official decision-makers, it is noteworthy that prominent public sector international organizations have engaged with the GTA. When the European Bank for Reconstruction and Development EBRD sought to update its investment guidelines so as to refrain from investing in firms that benefit from protectionism, they turned to GTA data to better understand policy developments in their countries of operation.

However, do recent years mark a break in government discrimination against foreign commercial interests? Intertemporal variation in crisis-era policy response can inform the answer to this question.

Resort to discrimination against foreign commercial interests far exceeds steps to level the commercial playing field. Source Global Trade Alert. Data accessed 8 December Some caution is needed in interpreting these annual totals as the GTA team updates totals for earlier years when new relevant information becomes available. A correction for reporting lags is in order. In one case, the number of harmful acts is divided by the number of years since each year began through to November Correcting for reporting lags in this manner is revealing.

The reporting lag-corrected annual totals call into question the notion that, as far as firms engaged in cross-border commerce are concerned, the world economy continued to move towards a level commercial playing field once the Global Financial Crisis hit. If anything shifts away from a level playing field accelerated over time and were not confined to when financial markets froze. Indeed, once one sets aside policy intervention that has been removed, unwound, or expired, by November worldwide a total of discriminatory public policy acts implemented since November were still in force.

The corresponding stock of liberalizing measures still in effect stood at measures. Attention now turns from counts of policy intervention to the scale of international trade affected by crisis era protectionism. For policy interventions affecting trade in goods, each entry in the GTA database conservatively identifies the six-digit product codes from the UN Harmonized System associated with each implemented intervention.

With these codes, information on the affected trading partners the identification of which was discussed earlier , and knowledge of whether a policy intervention affects imports or exports, it is possible to compute with detailed UN COMTRADE data 63 the total amount of trade potentially covered for the years in which each policy intervention is in force.

A fifth of world goods exports In contrast, On this evidence, since the onset of the GFC, state action to relax the budget constraints of favored firms has been far more pervasive than steps to tax the imports of foreign rivals. Such evidence supports the proposition that the principal form of discrimination against international business changed again with the latest sharp global economic downturn.

The overall percentages of world exports affected may have grown more slowly since but, as the years have gone by, more and more exports have competed in foreign markets against a larger number of trade distortions. While no major trading nation imposed across-the-board trade restrictions in the wake of the Global Financial Crisis, that is of little comfort if, instead, the cumulative effect of thousands of discriminatory policy interventions is to affect very large percentages of world trade.

The absence of import tariff increases similar to the US Smoot Hawley tariff hikes witnessed in the s does not guarantee undistorted global commerce. There is, of course, more to contemporary global commerce than trade in goods. What about crisis-era treatment of FDI? Even during the crisis era official reports have given the impression that, by and large, policy still becomes more favorable to foreign investors. Does the information in the Global Trade Alert database confirm this finding?

A difficulty in answering this question is that it is unclear what criteria UNCTAD uses when deciding whether to include a policy intervention in its counts. Once localization requirements are taken into account, over policy interventions harmful to FDI have been implemented since the crisis began. FDI entry and ownership rules are still being liberalized but not other policies. One feature of recent years has been the growth of typically sector-specific rules requiring the use of local labor, parts, components, and data storage facilities or the provision of incentives to source these items locally.

These measures can skew the implementation of cross-border supply chains, often lowering the profitability of the foreign firms involved. By , the total number of harmful policy steps still in force was more than two-and-a-half times the total number of beneficial policy interventions. It is far from clear that since the onset of the Global Financial Crisis FDI has been treated as favorably as the stylized facts reported in successive World Investment Reports suggest.

Presumably, forward-looking foreign investors take into account their expected treatment post-establishment as well as any pre-establishment bargain they strike with a foreign government. This discussion of intertemporal variation can only go so far as information on the resort to discrimination and liberalizing policies before the Global Financial Crisis has not been collected by the GTA team. This prevents decisive comparisons of policy stance before and after the onset of the Global Financial Crisis.

Still, two observations can be made. Given the number of jurisdictions, sectors, and policy instruments monitored by the GTA team, there is the potential for substantial cross-sectional variation in policy response to the Global Financial Crisis. The purpose of this section is to highlight some of key dimensions along which cross-sectional variation has been detected so far. States differ markedly in the mix of discrimination and liberalization implemented since the onset of the global financial crisis. There is also significant within-regional variation. Argentina and Venezuela stand out in Latin America, having particularly discriminatory track records since the onset of the Global Financial Crisis.

Even within Europe, where the rules of the Single Market and the like apply, there are considerable differences in the resort to discrimination, with certain Scandinavian nations intervening less often to the disadvantage of international business than the larger European Union member states France, Germany, Italy, and the United Kingdom.

Common rules, it seems, do not translate into common propensities to discriminate. Policy instruments harming foreign commercial interests, by MAST chapter and listed in descending frequency of use. However, less transparent forms of protectionism account for more than half of the crisis-era total. Additional subsidies to farmers and manufacturers, 71 state inducements to exports, and steps to restrict foreign access to public procurement together account for over of the policy interventions harming foreign suppliers since November Once again, the mix of protectionism adopted has changed with a new sharp global economic downturn.

When it comes to predicting the form of prevalent forms of protectionism during global economic crises, the policy response to previous crises may not be that helpful a guide. The propensity for harmful intervention to endure seems to differ as well. Thirty percent of import tariff increases and nearly half of harmful public procurement acts implemented during the crisis era have lapsed as of this writing.

The G7 group of industrialized countries is responsible for a high proportion of the subsidies granted and the harmful public procurement measures. In contrast, the BRICS group of large emerging markets are responsible for large proportions of trade-related investment measures and price control measures. During a global financial crisis, many governments simultaneously face pressure to reflate national economies and defend national commercial interests.

As it is possible to track when governments adopt new harmful interventions of a given policy type, the spread over time of policy interventions of interest to international business can be analyzed. The protectionist policy mix facing managers of firms in these five sectors differs. The most hit sector — transport equipment — stands out as commerce there has been distorted by repeated resort to export incentives, other subsidies, and import tariff increases.

Steps to boost exporters at the expense of trading partners were also a common feature in the base metals sector, along with import tariff increases. Interestingly, in all five of the most hit sectors import tariffs represented more than a fifth of protectionist measures taken. Contingent protection was, relatively speaking, more prevalent in the special purpose machinery and basic chemicals sectors.

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Policies that put foreign bidders for state contracts at a disadvantage were an important part of the policy mix facing internationally active firms in the fabricated metal sector. The five most hit sectors also differ in the degree to which protectionism has been unwound or removed over time. In the transport equipment and basic metals sectors, less than a fifth of protectionism imposed since November had been removed at this time of writing. The period since the GFC therefore affords an opportunity to better understand why protectionism persists longer in some sectors than others, with potential implications for the effectiveness of different corporate non-market strategies.

More generally, on the assumption that the shocks facing firms and governments during and after the GFC are greater than during traditional business cycles, observed cross-country differences in policy choice during periods of extremis may reveal more about the underlying drivers of MNE treatment by governments than in normal times. International business scholars have been urged to work on first-order global problems facing the managers of international business Buckley et al.

Surviving and thriving during a global financial crisis may not have been the only systemic challenge of the past decade climate change comes to mind , but arguably it meets the test of being first-order. Yet both international economics and international business research on this topic have been impaired because the factual record on the crisis-era government response affecting cross-border commerce has not been documented adequately. This paper fills that lacuna which, in turn, should attenuate the project selection bias, inadequate scrutiny bias, and omitted variable bias created by data paucity.

As a result, new opportunities to test existing understandings of international business, to formulate novel hypotheses, and to reconceptualize international business arise. With strong roots in actual government response, such research would meet the test of being phenomenon-based and, so the argument goes, enhance the relevance of international business scholarship Doh, By , a decade after the start of the Global Financial Crisis, foreign firms competing against bailed out or subsidized rivals in their home markets is common; cross-border trade in one-fifth of world exports were so affected.

Government measures to promote exports cover much more of world goods trade than measures to limit imports. Export mercantilism is central feature of the crisis-era commercial landscape. Contrary to UNCTAD statistics that are widely used in international business research, during the crisis era, adverse changes in government policies towards the establishment and operation of FDI were as common as policy intervention favoring foreign investors.

Once localization measures are taken into account, during the crisis era three-quarters of policy changes likely to affect FDI were adverse. Any notion of a standard or common policy response by governments to the Global Financial Crisis should be set to aside. There is considerable within-region and within-stage-of-development variation in the propensity of governments to discriminate against foreign commercial interests. The policy mix of larger economies tends to be skewed away from traditional trade restrictions and towards to murkier less transparent forms of state discrimination against foreign commercial interests.

During a global financial crisis, governments simultaneously face pressures to reflate national economies and to protect national commercial interests. In such circumstances, the copying of discriminatory intervention can be expected, especially if the first to break an international trade norm is a major trading nation. These findings may challenge the assumptions held by some, which may in turn provoke further useful data collection, raise definitional questions, and stimulate methodological improvement.

Reference has already been made to the treatment of foreign direct investors. Here, the Global Trade Alert data provides a counterpoint to the evidence presented in successive World Investment Reports. The findings of this paper differ from those found in the reports of the international organizations charged with monitoring contemporary protectionism.

Firms operating internationally have witnessed literally thousands of policy interventions that tilt the commercial playing field in favor of local rivals. Some may be tempted to defend the current system of trade rules by arguing that, in their absence, matters would have been worse. Perhaps, an alternative to posing this particular counterfactual is to consider the possibility that the incomplete nature of existing trade rules resulted in pressure for protectionism being channeled into less regulated and less monitored public policies.

Existing trade rules may have influenced the form rather than the quantum of protectionism against international business. The findings presented here also call into question the wisdom of framing debates about the future course of globalization in terms of whether the world economy will remain relatively open or become closed. This dichotomy — probably a legacy of reading too much into the experience of the s — tends to associate closure with widespread trade distortions and openness with their absence.

Openness may indeed follow from the presence of few or no import or export restrictions, but an open world economy can still be one thoroughly distorted by other policy interventions, such as widespread resort to export incentives and subsidies to prop up local firms. That severe global economic downturns affect many governments simultaneously encourages collective state deviations from any prevailing norms of non-discrimination in international commerce, with the potential to profoundly redraw the boundaries between state and market and between domestic and foreign commercial interests.

The current trade tensions between the United States and its major trading partners may adjust those boundaries further. While the focus of this paper is on the differential treatment of domestic and foreign firms, sharp global economic downturns have often been followed by other profound changes in government policy. For example, the Great Depression was followed by the rise of Keynesian macroeconomic management and considerable regulation of labor and product markets such as the New Deal in the United States. The sharp global economic recession of the early s was also associated with monetarism and followed by privatization and supply-side reforms in many countries.

Bhagwati observed that in the secretariat of the General Agreement on Tariffs and Trade noted with alarm the introduction of 63 safeguard measures since , many of which involved voluntary export restraints. For the purposes of this paper, the GFC is said to start in the third quarter of , when a number of US lenders of subprime mortgages began reporting severe financial difficulties.

So as to be clear, the data presented in this paper refer to government policy interventions implemented from 1 November to 8 December when the revised statistics presented here were computed. The reasons for the 1 November start date are explained later. See, however, the recent analysis of by Niu et al.

They show that although average tariff rates have fallen, there has been a sharp increase in the number of non-tariff measures and their restrictiveness, principally in technical barriers to trade safety standards for manufactured goods and sanitary and phytosanitary standards safety standards for food, animals, and plants. Moreover, Niu and colleagues compared their findings with summary statistics on the resort to protectionism found in the Global Trade Alert, the database used in later sections of this paper, and find broad alignment.

National Board of Trade contains another overview of the global incidence of protectionism since the start of the GFC, drawing too upon the Global Trade Alert. It being understood that managers need not passively accept the business environment facing them Baron, ; Henisz, Kobrin , p. These reports include not only summary statistics on foreign direct investment but also the number of policy changes favoring and harming foreign direct investors.

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The phrases were chosen to cover a wide range of commercial policy-related terms likely to affect MNEs and, therefore, potentially of interest to international business scholars. For reasons that are unclear, the data source for this exercise only has information on JIBS from although this journal was launched in Goldberg and Pavcnik also identify lack of data on trade policy intervention beyond tariffs as a constraint on research on the impact of commercial policy decision-making. Multi-country, multi-industry studies are particularly prone to measurement issues.

In their survey of the factors responsible for the Great Trade Collapse of , Bems, Johnson, and Yi devote little attention to the impact of protectionism. To the extent that they do they focus on empirical studies of tariff changes and resort to contingent protection measures. This term covers many policy instruments including subsidies and regulatory policies such as technical barriers to trade, health standards for food, animals, and plants, competition policy, and investment policy. The point being made here concerns the paucity of data. International trade economists have long known and written about so-called non-tariff barriers to trade Baldwin, being a well-known early example.

However, going beyond case studies has been hampered by a lack of systematic data collection. Given that firms make strategic decisions concerning the latter, as readers consider the data on policy response presented in this paper hypotheses concerning link between policy change, corporate strategy, and shifts in trade and investment flows may come to mind. The World Trade Monitor is a respected source of monthly export volume data.

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Such as national stock market indexes. Recall in this regard that much FDI involves cross-border mergers and acquisitions, for which the price of shares is a relevant determinant. For a more extensive discussion of this statement, see Bhatia, Evenett, and Hufbauer and Ghemawat In some cases, such as an import tariff for which no exceptions are given, the discriminatory policy instrument affects all commercial entities supplying the market in question from abroad.

Consider a government of nation X that imposes a policy instrument Y. A party — which could be a firm or worker — is deemed foreign if it meets one of the following two conditions: it supplies markets in nation X from abroad or it supplies markets in nation X from within nation X but is foreign-owned. In principle, policy instrument Y can discriminate against a foreign firm that is located inside or outside nation X, both are relevant to managers of international business. It is important to stress that many public policy interventions do not induce changes in relative treatment.

First, expansionary fiscal policy that results in more goods and services being bought by government is not problematic on this score so long as foreign firms are treated the same as local firms when bidding for state contracts. Second, Quantitative Easing policies that lower interest rates across-the-board in a jurisdiction do not induce changes in relative treatment because, in principle, firms located abroad can borrow in the jurisdiction in question.

Quantitative Easing where the stated goal is currency depreciation is another matter, however. Fourth, nationwide cuts in corporate taxes that do not discriminate against foreign affiliates are unproblematic as well. In short, governments have plenty of tools available to them to stimulate their economies that do not discriminate against classes of foreign commercial interest. An important feature of many policies that so alter the conditions of competition by altering relative treatment is specificity in government favors. Specificity can arise for two reasons.

First, a single firm may be favored for example, a bailout of a local car producer , ultimately to the detriment of foreign rivals. Second, producers in a specific sector in the implementing jurisdiction may be favored for example, with sector-specific interest rate subsidies , in which case rivals located abroad are effectively discriminated against. Product specificity is possible too. Notice the argument advanced here refers to the effects of implementing a policy not the stated intent of the policy. Evaluating intent is fraught with difficulty and so is avoided in this paper.

This is not to imply that, in preparing its monitoring reports on protectionism, the WTO secretariat uses the relative treatment standard to identify protectionism — it does not. More on official monitoring later in this section. Note, however, that a health and safety regulation that treated all suppliers, irrespective of location and ownership, equally would anyway fail the relative treatment test for inclusion in the GTA database.

Exclusion of TBT and SPS measures therefore captures situations where a government puts in place a regulation for imports that is identical to a regulation it has already or simultaneously enacted for the like products produced within its jurisdiction. It is worth noting that, as a result of significant data collection efforts, researchers now have readily available comprehensive datasets of RTA formation and BIT making.

The gap in available data concerns unilateral policy action. Notice again the implicit association of protectionism with trade restrictions. The choice of years here corresponds to that in the WTO report; for completeness sake, a total of trade facilitating measures taken by the G20 during — The WTO also maintains a Trade Monitoring Database that includes crisis-era policy interventions by all of its members, not just G20 members.

Over the same timeframe, G20 governments initiated 85 trade remedy investigations into dumped products, subsidized goods, and import surges , terminated 60 such investigations, and introduced 33 measures that facilitated trade WTO, , p. At this time, this database includes entries. According to Google Analytics , at the time of writing, the entire GTA database has been downloaded times since the new GTA website was launched in Reactions to the adoption of the relative treatment standard were sought. That this standard is so close to the notion of discrimination used in official international trade circles meant that there were no adverse reactions to this approach.

When firms and the government in a country like Turkey borrow money in international financial markets, they typically do so in stages. First, banks in Turkey borrow in a widely used currency like U.

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The combination of less foreign investment capital and banks that are bankrupt can sharply reduce aggregate demand, which causes a deep recession. Many countries around the world have experienced this kind of recession in recent years: along with Turkey in , this general pattern was followed by Mexico in , Thailand and countries across East Asia in —, Russia in , and Argentina in In many of these countries, large government budget deficits played a role in setting the stage for the financial crisis. A moderate increase in a budget deficit that leads to a moderate increase in a trade deficit and a moderate appreciation of the exchange rate is not necessarily a cause for concern.

But beyond some point that is hard to define in advance, a series of large budget deficits can become a cause for concern among international investors. One reason for concern is that extremely large budget deficits mean that aggregate demand may shift so far to the right as to cause high inflation. The example of Turkey is a situation where very large budget deficits brought inflation rates well into double digits. In addition, very large budget deficits at some point begin to raise a fear that the borrowing will not be repaid. In the last years, the government of Turkey has been unable to pay its debts and defaulted on its loans six times.

The risk of high inflation or a default on repaying international loans will worry international investors, since both factors imply that the rate of return on their investments in that country may end up lower than expected. If international investors start withdrawing the funds from a country rapidly, the scenario of less investment, a depreciated exchange rate, widespread bank failure, and deep recession can occur. The following Clear It Up feature explains other impacts of large deficits.

If a government runs large budget deficits for a sustained period of time, what can go wrong? As debt grows, the national savings rate will decline, leaving less available in financial capital for private investment. The impact of chronically large budget deficits is as follows:. The conventional reasoning suggests that the relationship between sustained deficits that lead to high levels of government debt and long-term growth is negative.

How significant this relationship is, how big an issue it is compared to other macroeconomic issues, and the direction of causality, is less clear. What remains important to acknowledge is that the relationship between debt and growth is negative and that for some countries, the relationship may be stronger than in others. It is also important to acknowledge the direction of causality: does high debt cause slow growth, slow growth cause high debt, or are both high debt and slow growth the result of third factors?

In our analysis, we have argued simply that high debt causes slow growth. There may be more to this debate than we have space to discuss here. If a nation is experiencing the inflow of foreign investment capital associated with a trade deficit because foreign investors are making long-term direct investments in firms, there may be no substantial reason for concern.

After all, many low-income nations around the world would welcome direct investment by multinational firms that ties them more closely into the global networks of production and distribution of goods and services. In this case, the inflows of foreign investment capital and the trade deficit are attracted by the opportunities for a good rate of return on private sector investment in an economy. However, governments should beware of a sustained pattern of high budget deficits and high trade deficits. The danger arises in particular when the inflow of foreign investment capital is not funding long-term physical capital investment by firms, but instead is short-term portfolio investment in government bonds.

Just as a few falling rocks can trigger an avalanche; a relatively small piece of bad news about an economy can trigger an enormous outflow of short-term financial capital. In those cases when the budget deficit is the main cause of the trade deficit, governments should take steps to reduce their budget deficits, lest they make their economy vulnerable to a rapid outflow of international financial capital that could bring a deep recession. Over the period between and , the increases in the cost of a college education had far outpaced that of the income of the typical American family.

The ongoing debate over a balanced budget and proposed cutbacks accentuated the need to increase investment in human capital to grow the economy versus deepening the already significant debt levels of the U. In the summer of , President Obama presented a plan to make college more affordable that included increasing Pell Grant awards and the number of recipients, caps on interest rates for student loans, and providing education tax credits.

In addition, the plan includes an accountability method for institutions of higher education that focuses on completion rates and creates a College Scorecard. Whether or not all these initiatives come to fruition remains to be seen, but they are indicative of creative approaches that government can take to meet its obligation from both a public and fiscal policy perspective.

The government need not balance its budget every year. Since the global financial crisis, cross-border capital flows have plummeted, with banks pulling back in response to new regulation.

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Both cyclical and secular forces are behind the trade slowdown. Investment has been anemic for years. And the expansion of global supply chains seems to have reached the frontier of efficiency. In short, slower global trade is likely to be the new normal. None of this is to say that globalization is in retreat. Rather, it is becoming a more digital phenomenon. Just 15 years ago, cross-border digital flows were almost non-existent; today, they have a larger impact on global economic growth than traditional flows of traded goods.

The volume of cross-border data flows has soared fold since , and is expected to grow another nine-fold over the next five years. A manufacturer in South Carolina can use the e-commerce platform Alibaba to buy components from a Chinese supplier. A young girl in Kenya can learn math through Khan Academy.

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This new form of digital globalization is more knowledge-intensive than capital- or labor-intensive. It requires broadband connections, rather than shipping lanes. It reduces barriers to entry, strengthens competition, and changes the rules governing how business is done. Consider export activities, which once seemed out of reach for small businesses lacking the resources to scout out international prospects or navigate cross-border paperwork. While digital technologies open the door for small companies and individuals to participate in the global economy, there is no guarantee that sufficient numbers will walk through it.

That will require policies that help them take advantage of new global market opportunities.