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Friday, May 04, 2007

The Benefits from International Trade

Lately, the usual crowd has surfaced to cast aspersions at those who support enhanced globalization. But while there's no shortage of shrill attacks in much of the writing, there's something important that's generally missing from the attacks on globalization's supporters, actual evidence.

In a recent speech, Federal Reserve Chairman Ben Bernanke said:

How important is [international trade] for the health of our economy to trade actively with other countries? As best we can measure, it is critically important. According to one recent study that used four approaches to measuring the gains from trade, the increase in trade since World War II has boosted U.S. annual incomes on the order of $10,000 per household (Bradford, Grieco, and Hufbauer, 2006). The same study found that removing all remaining barriers to trade would raise U.S. incomes anywhere from $4,000 to $12,000 per household. Other research has found similar results. Our willingness to trade freely with the world is indeed an essential source of our prosperity--and I think it is safe to say that the importance of trade for us will continue to grow.

I was going to summarize the paper by Bradford, Grieco, and Hufbauer, "The Payoff to America from Globalisation," but I came across this op-ed from the Washington Post from June, 2005 from two of the three authors that explains the results in the paper very well, so there's no reason for me to do it again. Here's what they have to say:

The Payoff From Globalization, by Gary Clyde Hufbauer and Paul L.E. Grieco Washington Post, June 7, 2005: ...The "modern" debate over trade barriers can be traced to the 19th century. Then as now, the debate has been dominated by special interests (land barons vs. merchants in the 19th century; the AFL-CIO vs. the Chamber of Commerce today). There is no question that trade liberalization creates winners and losers. Affected citizens and companies have every right to plead their case.

But Congress should consider how freer trade affects the nation as a whole. Since World War II the United States has led the international quest to liberalize world trade and investment. With leadership from the White House, Congress has slashed the simple average tariff rate from 40 percent in 1946 to 4 percent today, and other industrial nations have done much the same. After a half-century of steady liberalization it is fair to ask, what do Americans have to show?

As it turns out, quite a lot. Using four different methods, we estimate that the combination of shrinking distances -- thanks to container ships, telecommunications and other new technologies -- and lower political barriers to international trade and investment have generated an increase in U.S. income of roughly $1 trillion a year (measured in 2003 dollars), or about 10 percent of gross domestic product. This translates to a gain in annual income of about $10,000 per household.

Unfortunately for the cause of continued liberalization, Americans do not receive this money as a check marked "payoff from globalization." Instead, the payoff is hidden within familiar channels: fatter paychecks, lower prices and better product choices (compare the telephones available now with the standard black model of 1980).

Nevertheless, each of our four methods uncovers a large payoff. First, we parse international data that correlate the expansion of international trade with economic growth. This shows that the increase in U.S. income sparked by more intense trade equates to 13.2 percent of GDP. In the second method, we calculate how lower tariffs stimulate U.S. productivity through competitive forces and bring greater product choices to U.S. producers and consumers. The estimate for these benefits comes to 8.6 percent of GDP. Third, we draw on a computable general equilibrium model to suggest how today's economy would react to the restrictive Smoot-Hawley trading environment of the 1930s. That exercise indicates an estimate of 7.3 percent more in GDP from liberal trade. Finally, we calculate the productivity benefits arising from use of imported components and find a benefit of 9.6 percent of GDP. While none of the four estimates is perfect, the broad result is clear: The benefits of trade and investment liberalization are positive and large.

Given the large gains from past liberalization, and today's low tariffs and modest investment barriers, skeptical commentators might say, "Been there, done that." But our estimates of future policy liberalization alone (excluding likely benefits from better communications and transportation) indicate that a move from today's commercial environment to global free trade and investment could produce an additional $500 billion in U.S. income annually, or roughly $5,000 per household each year. Much of the benefit would come from sectors of the economy that were effectively ignored during earlier rounds of liberalization: services, agriculture, transportation and trade with developing countries. No single trade or investment agreement can confer the entire range of benefits on Americans; instead, the prize requires steady liberalization...

Despite the huge payoff to the United States, maintaining political support for trade liberalization has never been easy. Poli Sci 101 gives the explanation: Large gains are widely dispersed, and much smaller private losses are highly concentrated. Surveying several estimates, we arrive at a middle-of-the-road figure of roughly 225,000 trade-related job losses per year. Most dislocated workers find new jobs in six months, many far sooner; but some are unemployed for an extended period. Even workers who are re-employed may face significant pay cuts. Taking these features into account, we estimate that the lifetime costs of a year's worth of trade-related job losses is roughly $54 billion, about $240,000 per affected worker. This is a huge loss on a personal level, but only about 5 percent of the annual national gains from liberalization. Moreover, a rough estimate of the adjustment costs to agricultural landowners suggests that the progressive removal of trade barriers and farm subsidies over a decade could lower agricultural land values by $27 billion a year. The strident opposition [to liberalization] from sugar barons such as the Fanjul family confirms that this is a sensitive matter. Yet again, lower property values are a one-time private loss and a fraction of national gains.

America's national interest will best be served by staying the course of free trade and investment. At the same time, it is morally imperative to address private losses incurred by dislocated workers; as well, it may be politically necessary to cushion the blow to agricultural land values. The federal government spends less than $2 billion per year helping trade-dislocated workers. Over the past decade, the Organization of Economic Cooperation and Development estimates that U.S. government policy has boosted domestic farm incomes by an average $40 billion per year through direct subsidies ($23 billion) and trade barriers ($17 billion). Given the enormous dividends from international trade, more should be done for workers forced to bear the burden of economic adjustment. Meanwhile, U.S. farm subsidies should be spent in ways that help farm owners adjust, rather than encouraging them to fight liberalization with all their political energy.

You can read Dani Rodrik if you want to know "under what conditions will trade liberalization enhance economic performance?" Little of that will be news to economists, but if it makes you feel better to think we are just learning these things, go read what he has to say.

Whatever the theory says, the evidence in this paper and the evidence more generally is pretty clear, globalization has large net benefits. If you want to have this debate, fine, let's have it. But let's engage on a professional level, not name-calling, etc., just because someone disagrees with you.

If you disagree that trade benefits the US overall, what are the problems with the econometric methodology used to produce these results or the results in other papers coming to similar conclusions? Saying the results must be wrong because they don't support your point is not an argument. What specifically in the data, estimation procedures, etc., do you think is problematic and leads to the wrong result? Are there other notable academic papers that come to different conclusions? If so, what is the source of the difference in the estimates? Is it the data, the estimation technique, the theoretical assumptions, or what? Help us to understand why we should be doubtful about the results Bernanke cited, or about the results of other papers reaching similar conclusions.

If you dig into a paper, you can always find its weaknesses. And it's important to do so because finding such weaknesses allows us to check to see if correcting the problems alters the conclusions. So please, have at it, take an honest look at the evidence and tell us why we should doubt this papers conclusions or the conclusion that trade is beneficial more generally, and help us to move things forward in our attempts to find the correct answers to these important problems. My own view is that the results from the papers in this area are very clear - trade is highly beneficial overall and it's the distribution of benefits and costs across individuals that's at issue - but I'm very open to well constructed arguments to the contrary.

Update: I meant to include this. In the post linked above, Dani Rodrik says:

I can see the next line of objections coming: Forget theory, some people will say. Look at the real world. Countries that follow open trade policies do so much better than those that don't.  Well, not so fast actually. But that has to wait for a later post.

In this post, I'm talking about evidence for the U.S.

[I didn't talk much about another important aspect of trade, how the benefits are distributed and how deals might be constructed to compensate the losers from trade. On one part of this, that "Large gains are widely dispersed, and much smaller private losses are highly concentrated," see the comments by Paul Krugman who notes losses are much more disperse than in the past, Brad DeLong who comments on Krugman's political economy argument, and another entry by Steve Waldman at Interfluidity who argues that free-trade has a powerful business constituency even if benefits to households are diffuse.]

    Posted by on Friday, May 4, 2007 at 01:56 PM in Economics, International Trade | Permalink  TrackBack (0)  Comments (87)



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