For much of the post-war era, globalisation was viewed as an unstoppable force. Expanding international trade contributed to economic growth, lifted millions out of poverty, and strengthened interdependence among nations. But in recent years, this trajectory has shifted dramatically. Protectionist policies, escalating trade wars, and weakened multilateral institutions such as the World Trade Organization have given rise to concerns about “de-globalisation.”
The consequences of this retreat from trade are often discussed in terms of growth, investment, or employment. Yet an equally important – and less examined – dimension is its impact on fiscal capacity: the ability of governments to raise and mobilise revenue.
In our recent study, published in the eJournal of Tax Research, we examine how international trade affects tax performance across countries. Using a robust empirical strategy, we find that openness to trade significantly increases both tax revenue and tax efficiency.
This means that declining trade integration could reduce governments’ ability to fund public services and development priorities, especially in emerging markets.
Why trade matters for taxation
International trade influences taxation through several mechanisms:
- Direct revenues from tariffs and duties. Although tariff rates have generally declined due to liberalisation, the sheer growth in trade volumes often offsets part of this loss.
- Expansion of the tax base. Trade stimulates economic growth via specialisation, technology transfer, and productivity gains. Firms that engage in export and import markets are more likely to operate in the formal economy, making them easier to be taxed.
- Improved tax administration. Integration into global markets often encourages institutional reforms. Trade agreements demand modernisation of customs, adoption of international best practices, and digitalisation of documentation, which can spill over into tax collection more broadly.
In short, trade affects not just how much can be taxed, but also how efficiently governments can collect taxes.
Moving beyond correlations
Existing studies have noted links between trade and tax variables, but most rely on correlations. For example, some find that openness is associated with lower corporate tax rates due to competitive pressures, while others argue that trade shocks affect revenue in developing countries. However, these correlations cannot establish causality. Do open economies tax better, or do better tax systems enable openness?
To answer this question, we apply two complementary methodologies:
- Instrumental variable (IV) regressions. We construct an instrument for trade openness using purely geographical determinants of bilateral trade (distance, borders, and common language), following the influential approach of Frankel and Romer (1999). This isolates the component of trade flows unrelated to policy or institutional quality and allows us to estimate the causal impact of openness on tax revenue.
- Stochastic frontier analysis (SFA). Tax performance is not just about ratios of revenue to GDP. It also depends on efficiency – how close a country comes to collecting its potential revenue given structural characteristics. SFA allows us to estimate this “tax effort” and to examine how trade affects inefficiency, drawing on the approach pioneered in Tran-Nam and Le (2022).
Our study uses cross-country data for 2021, covering both advanced and developing economies. We include a broad set of controls to ensure robust results.
What we found
1. Trade increases tax revenue
Our IV estimates show that a 2.5% increase in trade openness (imports and exports as a share of GDP) leads to about a 1% rise in the tax-to-GDP ratio. This effect is statistically significant once institutional controls are included, and it is larger than what ordinary correlations suggest.
For example, a country with a tax ratio of 20% of GDP could see this rise to 20.2% following a modest increase in trade openness. While small in percentage terms, these differences translate into substantial fiscal resources, particularly in economies where public spending needs are pressing.
2. Trade enhances tax efficiency
Our SFA results confirm that trade openness reduces tax inefficiency. More open economies are closer to their potential revenue capacity, even after controlling for governance and economic variables. This suggests that trade has a structural effect on how well tax systems function, not just how much they collect.
3. Developing economies gain the most
The positive effect of trade on taxation is especially pronounced in “non-rich” countries (those with GDP per capita below USD 10,000). For these economies, international trade is not only a growth driver but also a fiscal lifeline. Protectionist shifts could therefore undermine their ability to fund infrastructure, health, and education.
4. Not all countries are equal
High-income economies like Switzerland or the United States exhibit relatively low “tax effort” despite strong institutions – reflecting policy preferences for lower taxation rather than inefficiency. By contrast, countries such as Lesotho or Nicaragua demonstrate very high tax effort, collecting close to or above their estimated potential despite institutional challenges. These examples underline that trade’s benefits interact with domestic choices and contexts.
Policy lessons
Our findings carry three broad implications for policymakers navigating today’s uncertain trade environment:
1. Preserve and deepen trade openness
Even if global multilateralism weakens, regional and bilateral trade agreements can still deliver fiscal benefits. For emerging economies, actively pursuing integration with dynamic partners is critical.
2. Strengthen domestic tax systems
Trade openness often brings institutional reforms. Governments can replicate these benefits by investing in digitalisation, simplifying compliance, reducing corruption, and professionalising tax administration.
3. Diversify revenue sources
Relying on trade taxes alone is risky. Broader value-added tax systems, more comprehensive income tax bases, and policies that encourage formalisation of economic activity can insulate fiscal systems from trade shocks.
Looking forward
As the world edges toward greater protectionism, the fiscal risks are real. Lower trade volumes will not only shrink direct tariff revenues but also reduce the indirect gains of openness: wider tax bases, institutional improvements, and enhanced efficiency.
Critical questions remain:
- Will fragmented bilateral deals substitute adequately for multilateral frameworks?
- How can developing economies preserve fiscal space in a less integrated world?
- What reforms are needed to sustain tax efficiency when trade-related pressures for modernisation recede?
Our research shows that the costs of de-globalisation are not limited to slower growth. They extend into governments’ ability to mobilise resources for pressing challenges, from climate resilience to health systems and education. For policymakers, the message is clear: retreating from global trade integration carries significant fiscal risks.
Further reading
Le, T. H., Ngoc, P. T. B., & Van, P. H. (2025). International trade and tax performance. eJournal of Tax Research, 23(1), 162-190.
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