What’s to be gained from more trade liberalization?
As part of its ongoing Copenhagen Consensus project on global issues, the Economist reports this week on the effect that the elimination of protectionist barriers would have on global economic growth: Subsidies are a naked transfer from taxpayers to corporate mendicants; they are also an indirect transfer to overseas consumers, who enjoy artificially depressed prices ...
As part of its ongoing Copenhagen Consensus project on global issues, the Economist reports this week on the effect that the elimination of protectionist barriers would have on global economic growth:
As part of its ongoing Copenhagen Consensus project on global issues, the Economist reports this week on the effect that the elimination of protectionist barriers would have on global economic growth:
Subsidies are a naked transfer from taxpayers to corporate mendicants; they are also an indirect transfer to overseas consumers, who enjoy artificially depressed prices as a result of the handouts. Tariffs on the other hand raise money for the treasury’s coffers at the expense of foreign exporters and home consumers, who face higher prices as a result of the restriction on trade. Do the gains to one group offset the losses to another? Emphatically not. Tariffs and subsidies drive a wedge between demand and supply, imposing “deadweight” costs on an economy. Tariffs discourage worthwhile production (of goods that would cost less to make than consumers are willing to pay), while subsidies encourage worthless overproduction (of goods that would cost more to make, sans the subsidy, than consumers are prepared to pay). Eliminating such distortions would allow prices to resume their proper job of equating supply and demand. As a result, capital and labour would be reallocated across industries to reflect a country’s comparative advantage. The gains to the world economy would be sizeable: $254 billion per year (in 1995 dollars), according to a recent paper by Mr Anderson and his colleagues. The bulk of the gains come from agriculture, which also carries the heaviest distortions. If the rich countries stopped intervening on behalf of farmers, the global economy would gain by $122 billion—and the rich world would benefit most of all, collecting $110 billion of those gains. Poorer countries, on the other hand, stand to gain the most, $65 billion, from liberalising their own trade regimes, not waiting for rich countries to free theirs.
[Sure, but that’s free trade in the abstract. What about the real world sausage of the Doha round of the WTO?–ed.] For that, let’s reprint this from Kym Anderson’s article summary:
An optimistic assumption of 50% across-the-board cuts to bound tariffs and farm subsidies leads to predicted benefits of approximately half those to be derived from full liberalisation – around $200 to $1000 billion a year – although with a different balance of beneficiaries. No allowance has been made in those estimates for reform-stimulated economic growth or for the effect of liberalising labour or capital markets. If these were included, the benefit could be much higher.
Click here for links to Anderson’s full paper, in addition to two “opponent note” rejoinders.
Daniel W. Drezner is a professor of international politics at the Fletcher School of Law and Diplomacy at Tufts University and co-host of the Space the Nation podcast. Twitter: @dandrezner
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