Sunday, May 16, 2004

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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 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.

posted by Dan on 05.16.04 at 11:56 PM


I think everyone agrees in abstract that removing trade subsidies is a good thing but in practice you run into the Scylla of foreign governments that through currency manipulation or corporate dumping and on the other hand the Charybdis of protectionist domestic lobbies.

"Free trade" won't really be possible without forming international producer coalitions that will help regulate and standardize practices among producers. I'm not talking "quotas" or anything ridiculous here, just the sort of general agreements and WTO enforceable production and sale practices that would prevent gouging, market-share capture through dumping, etc.

These issues are just too complex to wave away in the abstract ... everybody from the agribusiness lobby to Starbucks which is raising prices for increased dairy costs to shippers are going to want to have a say. The most important step we can take is to create such forums and staff them with the appropriate legal consul and mediators to work out disputes between industry representatives of different countries.

Essentially each industry from steel to Bree cheese production to Brazilian bananna imports is going to have to get hashed out in excruciating minutae.

If this doesn't happen, we'll never see the political will to identify and remove all the implicit and explicit subsidies and trade barriers.

posted by: Oldman on 05.16.04 at 11:56 PM [permalink]

Apparently everyone doesn't think free trade is such a grand idea. In fact, according to this article, it is a tool through which developed nations can suppress the progress of developing nations:

posted by: Dan P on 05.16.04 at 11:56 PM [permalink]

What Oldman is describing is exactly what does happen in a typical trade negotiation, especially one involving agriculture.

The short-term objective of such a negotiation is never "free trade" but "trade liberalization." Long-term objectives may be another story, depending on how far ahead you are looking; The important thing is to recognize that steps toward trade liberalization are not failures because they don't result in free trade as presented in an academic model.

I can't speak for Oldman, and in fact rather doubt this is his view, but there are plenty of libertarian commentators who recognize no such thing -- they will sometimes complain (after the fact) about government attempts to restrict trade, but look on specific steps to liberalize some sectors most burdened by trade barriers and subsidies with little more than a kind of hostile indifference, precisely because trade liberalization so rarely involves scrapping all rules instead of replacing a restrictive set of rules with a less restrictive one.

There are few policy areas where the distance between the Bush administration and its Republican predecessors is greater than trade. I've been sorry to see Republicans overall be fairly unmoved by this, but libertarians seem hardly to have noticed.

posted by: Zathras on 05.16.04 at 11:56 PM [permalink]

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