Tue, Mar 25, 2008 - Page 9 News List

The benefits of free world trade are in billions

Grasping globalization's overwhelming boost to welfare everywhere is potentially one of this generation's biggest challenges

By Kym Anderson and Bjorn Lomborg

Protectionist sentiment and fear of globalization are on the rise. In the US, presidential candidates appeal to anxious voters by blaming the North American Free Trade Agreement (NAFTA) for the erosion of the country's manufacturing base. Liberal trade initiatives have run into trouble in Congress, while new trade barriers have been mooted for products flooding in from China.

Things are no better in Europe. France has dealt the Doha round of WTO negotiations a blow by rejecting the outline deal on agriculture. European Commission President Josi Manuel Barroso believes that protectionist pressures are increasing.

When the Doha trade round was launched shortly after Sept. 11, 2001, there was plenty of international goodwill. But disenchantment with globalization -- and, in some regions, fear of immigration -- has since set in.

A recent Financial Times/Harris poll in the US, Germany, France, the UK, Italy and Spain found people nearly three times more likely to say that globalization is negative than positive.

Free trade would lead to an overwhelming boost to welfare everywhere, but especially in the developing world.

Grasping these benefits is potentially one of this generation's greatest challenges. Increased negative sentiment could have the worst possible result: not just Doha's failure, but also the raising of trade and immigration barriers.

These barriers remain largely because further liberalization would redistribute jobs, income, and wealth in ways that governments fear would reduce their chances of remaining in power -- and their own wealth in countries where corruption is rife.

The greatest hope is thus getting the Doha round back on track.

But there is a big difference between a low-quality result and one that is more comprehensive.

If little more is achieved than phasing out farm export subsidies and a modest reduction in agricultural domestic support, our analysis shows that developing countries as a group would gain nothing, while high-income countries would gain just US$18 billion per year by 2015.

By contrast, if developing countries cut their tariffs by the same proportion as high-income countries, and services and investment were also liberalized, the global annual gains could climb as high as US$120 billion, with US$17 billion going to the world's poorest countries. Moreover, the long-term impact of free trade is huge.

Recast as after calculating the net present value of the stream of future benefits, a realistic Doha outcome could increase global income by more than US$3 trillion per year, US$2.5 trillion of which would go to the developing world.

In addition, the experiences of successful reformers like South Korea, China, India, and Chile suggest that trade liberalization immediately boosts annual economic growth rates by several percentage points for many years.

Eliminating subsidies and trade barriers would mean that resources could be used more efficiently, so there would be more scope to reduce inequality and poverty, social tensions, environmental degradation, malnutrition, and disease.

There would, of course, be costs.

Firms and workers would need to adjust as reform forces some industries to downsize or close and allows others to expand.

In addition, there are social costs to consider. Yet the benefits of a successful Doha round are between 45 and 440 times higher than these costs. This is clearly an extremely sound investment.

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