Trade, Connectivity and Spatial Inequalities

Trade, Connectivity and Spatial Inequalities

A common economic development issue involves how a region can improve its participation in international trade, particularly if it is in a marginal and low connectivity situation. Under such circumstances, improvements in transport infrastructures (modal and intermodal) and the related increase in connectivity are perceived as strategies to foster trade and development. It is based on two main assumptions:

  • Development of regional comparative advantages. As connectivity increases, a region or a nation can improve its comparative advantages. Production can be located where inputs (such as land and labor) are lower, enabling better global competitive advantages. Outputs (parts and finished goods) can then be shipped to customers across the world, which increases trade intensity.
  • Development of regional economies of scale. A location can further develop economies of scale by having access to wider markets because of higher connectivity and associated lower transport costs. Even if other locations may have lower input costs, notably in terms of labor, these advantages may not initially be sufficient enough to compensate for the advantages of economies of scale.

Considering the balance between the centrifugal effects of comparative advantages and the centripetal effects of economies of scale, globalization and its associated growth in connectivity promote more centripetal than centrifugal forces (more inequalities). However, this shift is linked with a specific level of connectivity beyond which inequalities may be reduced.

Low connectivity characterizes relatively self-sufficient regional economies and fewer inequalities (A; as measured in GDP per capita). As transport costs are reduced through better connectivity, inequalities are likely to increase since economies of scale usually benefit core economies first (B). Since the core has a higher development rate than the periphery, and a pattern of unequal trade can emerge, as was the case between the developed and the developing countries up to the 1970s.

Since then, further improvements in connectivity incited a more efficient use of comparative advantages, compensating for the initial economies of agglomeration advantages that advanced economies had regarding many developing economies. The outcome was a relocation (offshoring and outsourcing) of some economic activities in the periphery and better access to the markets of the core. This was associated with a decline in inequalities (C), with the most dynamic elements of the periphery becoming part of the core. For instance, many developing economies, especially in Pacific Asia (Japan, Taiwan, South Korea, Hong Kong, Singapore, and more recently China), have experienced significant growth to become a pole (core) of the global economy.

Since trade intensity is highly related to growing connectivity to the global economy (export-oriented development), transportation has been a significant factor in reducing inequalities globally. However, the impacts of connectivity on trade may vary with the level of connectivity. Regions with low connectivity levels would likely get derived trade benefits, while regions with higher connectivity levels would be more dependent on induced benefits. In the first case, connectivity is more a driver of trade, while in the second case, trade is more the driver for connectivity improvements.