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Promoting free trade to help the world’s poorest
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GLOBAL free trade has helped lift more than a billion people out of poverty over the past quarter-century. Lowering trade barriers even more could double average incomes in the poorest parts of the world over the next 15 years.
Yes, there are costs to free trade, but the costs are vastly outweighed by the benefits. Yet, in rich countries today, the mood has turned against free trade. That is a tragedy. Politicians in rich countries tap into understandable public fear. A trade deal creates adjustment costs concentrated in particular areas, like the US Midwest and South, where manufacturing can be costlier and less efficient than overseas. Shuttered factories serve as highly visible, totemic warnings against open borders.
The far greater benefits of free trade are much less obvious. Consumers get a wider variety of goods at cheaper prices. Middle-class Americans gain an estimated 29 percent of their purchasing power from foreign trade. The effect is even bigger — 62 percent — for the poorest tenth of American consumers.
Opposition to free trade ignores our interconnected reality. Some 80 percent of trade happens along supply chains within or organized by transnational firms, according to a 2013 UN report. While some US politicians call for tariffs against Mexico, the National Bureau of Economic Research estimates that about 40 percent of the value of Mexican imports to the US is actually added within the US itself.
Moral argument
These arguments are all part of the overwhelming economic case for free trade. But the strongest argument is a moral one. Cost-benefit analysis shows that freer trade is the single most powerful way to help the world’s poorest citizens.
Reviving the Doha Development Round of global free-trade talks would reduce the number of people in poverty by an astonishing 145 million in 15 years, according to research commissioned by the Copenhagen Consensus Center. The world would be US$11 trillion richer each year by 2030, with US$7 trillion going to developing countries — equivalent to an extra US$1,000 for every person every year in these countries by 2030.
Trade also carries much broader benefits for society. Economic globalization has been shown to reduce child mortality and extend life expectancy, owing to increased incomes and better information. What’s more, “free trade is good for the environment,” to quote one academic study. Although each 10 percent increase in production leads to 2.5-5 percent more pollution, the higher income from this output drives better technology and more stringent regulations, which in turn reduces pollution by 12.5-15 percent.
At the same time, free trade has been shown to create more jobs for women, reduce employment discrimination, and improve human-rights conditions. Of course, not everyone benefits from freer trade. Some people lose their jobs, and some of them will struggle to find other work. But it is important to have a sense of the size of the problem.
One recent study suggests that free trade increases income inequality, and the cost of redistribution could erode upwards of 20 perecnt of the gains. This indicates we should be willing to spend perhaps 20 percent of trade benefits on helping the losers from trade deals.
But it also shows that 80 percent of the benefits stand on top of a reduction in lower poverty, child mortality, and pollution, higher life expectancy, and less gender- and race-based discrimination.
Bjørn Lomborg is Director of the Copenhagen Consensus Center and a visiting professor at the Copenhagen Business School. Copyright: Project Syndicate, 2016. www.project-syndicate.org. Shanghai Daily condensed the article.
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