Economics, Politics, Social Commentary and occasionally Superstring Theory.

Saturday, December 04, 2004

Gains From Trade

The Economist has a story citing a new study* by Scott Bradford, Paul Grieco and Gary Hufbauer, of the Institute for International Economics (to be published in January.) The study attempted to measure the gains that the U.S. has realized through increased global trade.

This can be something of a Herculean task. Attempting to isolate out historical gains that are due only to global trade, rather than say productivity increases or transportation cost decreases, is rather daunting. The authors of this study attempted a couple of different methods, but the one I like the most is the counterfactual: Where would the U.S. be if it hadn't opened itself up to trade after WWII?

If the same protectionist tariffs were in place today, it would knock off 2.4% of GDP. If our neighbors responded with their own escalated tariffs, it would knock 2.1% of our GDP. Taken together, tariff and non-tariff barrier liberalization can be thanked for about 7.3% of GDP.

The authors then combined this finding with their macroeconomic and microeconomic modeling, and took the average of the gains to come up with about $1 trillion per year in benefits to the U.S. That's an extra $9000 per person per year due to free trade. The study goes on to say that there's at least a comparable amount to be gained by further trade liberalization, not just in the U.S. (which has an average bounded tariff rate of 3%, but an actual average tariff rate of about 2%) but in the developing countries as well.

I'll just say to those of you who might think globalization is bad for the world's poor, you are utterly incorrect. The developing world is craving increased opportunities for trade. More has been done in the last 50 years, more people brought up out of poverty, than the last 500. China alone has lifted over 100 million people out of poverty since it began adopting market reforms. Other countries are desperate to do the same. The blind spot in most people's thinking is that trade is somehow a zero sum game. If the U.S. is winning, then someone must be losing, and it's probably the poor. But trade is not a zero sum game. It can be a positive sum game.We all make positive sum trasnactions every day, teading our labor for coffee, food, computers, etc. Developing countries just want that same opportunity.

* “The Payoff to America from Global Integration”. Forthcoming in “The United States and the World Economy: Foreign Economic Policy for the Next Decade”, edited by Fred Bergsten, to be published in January by the Institute for International Economics


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