Narrowing Paths of Trade and Development: Why Emerging Markets Struggle to Replicate the Export Miracle

Introduction

For a long time, international trade has been regarded as the core engine for developing countries to achieve leapfrog development. From South Korea to China, a group of economies have transformed from low-income agricultural nations to industrial powerhouses within just one generation. Economists attribute this achievement to trade openness and export-led growth. However, as the global economy enters a new phase, this traditional path is facing unprecedented challenges.

In a recent study (Goldberg & Ruta 2025), we systematically examined the impact of the current global environment on development prospects. The core conclusion is that although trade will continue to support economic growth, the possibility of replicating the past export-driven "growth miracles" is sharply declining. Two key mechanisms—access to advanced economy markets and cross-border knowledge spillovers—are being eroded by structural, policy, and geopolitical factors.

Dynamic Channels of Trade for Development

Traditional trade models focus mainly on welfare improvements from static comparative advantage but fail to explain the massive growth achieved by countries like South Korea. In fact, the most profound impacts of trade on development occur through dynamic channels that drive long-term changes in factor endowments, technology, and institutions.

• Market size effects: Access to large markets enables firms to achieve economies of scale and adopt modern technologies. Micro-level evidence shows that export expansion prompts firms to scale up and upgrade equipment.
• Technology upgrading: Trade promotes technology diffusion through "learning by exporting," importing intermediate goods, quality upgrading to cater to high-income markets, and inter-firm knowledge spillovers within global value chains.
• Institutional anchoring: "Deep" provisions in trade agreements—covering investment, competition, intellectual property, etc.—provide external constraints for institutional improvement, driving trade integration and growth.

Three Key Conditions Are Unraveling

The realization of the above dynamic effects depended on three conditions: technological development allowing production fragmentation (global value chains); liberalization of trade and industrial policies in advanced economies providing market access for developing countries; and a relatively stable geopolitical environment allowing economic efficiency to take precedence over security concerns. Today, all three conditions have fundamentally changed.

Structural Changes: Automation and Digitalization

Automation directly challenges the traditional low-skill manufacturing development path. Taking the textile industry—the traditional entry point for developing countries into manufacturing—as an example, 64% of jobs are technically replaceable by robots, but current robot adoption is only 0.35 units per million hours, far lower than the 10.8 units in the automotive industry. Although the full impact of automation on trade is not yet apparent, two opposing trends have emerged: some studies find that automation increases imports from developing countries through productivity improvements; others observe that automation, combined with supply chain risk perception, leads to declining exports and reshoring.

Digitalization presents a more complex picture.Digitalization presents a more complex picture. It has reduced logistics and communication costs, accelerated trade facilitation, driven e-commerce, and been particularly beneficial for developing countries in global value chains. Trade in services has grown rapidly, maintaining resilience even during economic shocks. However, the fastest-growing service exports (such as professional services and IT services) are skill-intensive, mismatched with the comparative advantages of developing countries. Moreover, the service sector in developed economies remains protected by domestic regulations. Most critically, there is no evidence yet that trade in services can drive the deep structural transformation of overall economies in the same way manufacturing has.

Structural Change: Climate Risks

The impact of climate change on developing countries' export prospects is not primarily reflected in shifts in comparative advantage. Recent research shows that the trade effects of changes in agricultural productivity are limited, with losses mainly realized through domestic redistribution. However, the increasing frequency and intensity of climate-induced natural disasters pose a more serious threat. Between 1980 and 2023, low-income countries experienced three times the frequency of disasters per unit of land area as high-income countries, and their climate vulnerability is significantly higher. These disruptions may hinder future participation in global value chains—firms tend to locate production in regions with lower climate risk. This dynamic is already evident in the automation-induced reshoring concentrating in low-risk countries.

Policy Shifts: Industrial Policy Revival and Protectionism

Policy shifts may pose a more direct challenge for developing countries. From 2009 to 2023, industrial policies in advanced economies first increased at a pace similar to developing economies, then accelerated further after 2020. This contrasts sharply with the era of "hyper-globalization," when major advanced economies rarely adopted strong interventions. Today, strategic competition, climate goals, national security, and supply chain resilience are driving policy.

This shift has profound implications for developing countries. Historical success stories (China, South Korea, Taiwan, Vietnam) combined industrial policy with access to technology through foreign partnerships. For example, China’s "reciprocal" arrangements—trading market access for technology sharing—fostered rapid catch-up. But the current environment is markedly different. U.S. semiconductor policies explicitly target reshoring production, not dispersing to lower-cost overseas locations. The changing trade-off between national security and economic efficiency directly squeezes developing countries’ development space.

Meanwhile, industrial policies of large emerging markets (especially China) create additional negative spillovers. Evidence shows that Chinese subsidies have a larger positive effect on exports from developing countries than on those from advanced economies, particularly in electrical machinery and automobiles. These measures crowd out third-country exports through import substitution and intensified competition in export markets. Chinese shipbuilding subsidies once crowded out more efficient Japanese and Korean producers, showing that industrial policies in large emerging markets may target traditional sectors, generating negative spillovers without economic externalities.

Climate policies also impose constraints while creating selective opportunities.Climate policies also create constraints while generating selective opportunities. The EU's Carbon Border Adjustment Mechanism (CBAM) plan—though not yet fully implemented—could cause developing countries to lose competitiveness in high-carbon products.

Conclusion: Paths Narrowed, but Not Entirely Closed

Synthesizing the above analysis, the likelihood of developing countries replicating the growth miracle of the Asian Tigers has significantly diminished. Automation has eroded the ladder of low-skill manufacturing; trade in services cannot fully replace the transformative role of manufacturing; climate risks have increased investment uncertainty; and industrial policies and protectionism in advanced economies have further narrowed market space.

Nevertheless, trade will remain an important tool for development. The key lies in countries finding new pathways:

• Trade in Services: Although services cannot perfectly substitute for manufacturing, digital technologies offer opportunities for small and medium-sized developing countries to participate in remote service exports.
• Green Transition: Climate change is both a risk and an opportunity. Upfront investments in areas such as renewable energy and carbon capture may create new comparative advantages.
• South-South Cooperation: Regional trade agreements and regional value chains (e.g., the African Continental Free Trade Area) can provide alternative markets, reducing dependence on traditional developed markets.
• Refinement of Industrial Policies: Developing countries need to strike a careful balance between protecting key industries and maintaining openness, avoiding the negative spillovers that large emerging markets have experienced.

In short, the global trade environment has undergone a fundamental shift. Developing countries must rethink their development strategies based on their own endowments and external realities. The international community should also avoid unilateral policies that worsen development prospects; rebuilding a multilateral cooperation framework is more urgent than ever.