In June 1930 the Smoot-Hawley tariff act in the US turned a stock market collapse into a crippling, decade-long Great Depression. Now, with a financial meltdown going on, is therefore NOT the time for politicians to be more protectionist. Yet last year the European Union dropped the principle of "free and undistorted competition" from its Lisbon treaty, and this year US presidential hopefuls Barack Obama and Hillary Clinton are muttering negatively about liberal trade and migration. Meanwhile, massive agricultural subsidies look likely to continue under the new US farm bill despite record high prices in international food markets – prices that are partly due to US and EU mandates and subsidies for biofuels.
The benefits of high food prices
According to international food agencies, today’s high agricultural prices, to which income growth in China also is a contributor, look set to continue for some years rather than being just a short-term blip. That is just the god-send that the WTO’s Doha round of multilateral trade negotiations needs to bring member governments back to the negotiating table. The agricultural talks have been the stumbling block, yet agricultural policies contribute about one-third of the global cost of subsidies and barriers to merchandise trade and so need to be an integral part of any Doha agreement.
How do today’s high international food prices help? Because they allow WTO-bound food import tariffs and other forms of farm price support to be lowered without it requiring actual prices received by farmers in the EU, US and Japan to fall much below the levels they would otherwise receive in the next few years. That may not help agricultural-exporting countries immediately, but it will in years to come when international food prices return to more-normal levels.
The gains from liberalisation
The costs of merchandise trade barriers and farm subsidies are very conservatively estimated to be of the order of $300 billion a year. It assumes competition is perfect, which it is not, and that nothing happens to services policies under Doha, which again is too pessimistic. We suggest that if more realistic assumptions are used, estimates of the global cost of protection actually rise from anywhere between $460 billion a year to over $2.5 trillion.1
But more trade in goods is only part of economic liberalisation. Another is trade in "factors of production", including labour. Several recent studies have suggested huge gains even from modest liberalisations in the mobility of labour. For example, an increase in migrants from developing to high-income countries that accumulates to a 3 percent boost in the latter’s labour force (both skilled and unskilled) by 2025 might increase global income by nearly $700 billion a year by 2025. This flow represents a total of 14 million workers and their families coming at the rate of a little over 500,000 extra migrant workers per year. It entails a loss of merely 0.4 percent of the developing countries’ workforce, and even in the developing countries’ skilled category it represents only a 1.7 percent loss of workers. Even if you subtract the cost of moving to the host country for immigrants and the social-welfare benefits they may get when they arrive, the net benefits are sizeable compared with those from freeing up trade in goods.
Estimates of the net benefits from a permanent partial reform of goods trade barriers and farm subsidies following the Doha round, and those from expanded migration over the period to 2025, have been generated using the same economy wide global economic model that is used by the World Bank for projecting world economic growth. The figures vary with assumptions and the discount rate used, but projections through to 2100 show that developing countries would enjoy an increasing share of the benefits of free trade as their economies expand. Under an optimistic trade reform scenario, the present (2008) value of net benefits of trade liberalisation (if we ignore the impact reform could have on economic growth rates) is almost the same as that from 25 years of expanded migration from a global perspective.
Specifically, the net gains from Doha partial trade reform through to 2100 – even if no growth dividend is included – are as much as $11 trillion using a 6% discount rate, or $36 trillion if 3% is used, while those from greater migration to 2025 are $12 trillion or $38 trillion at 6% and 3% discount rates, respectively. Importantly, it is citizens of today’s developing countries who overwhelmingly would reap the lion’s share (around three-quarters in aggregate) of those benefits. If one adds in the potentially large, but less well estimated, effects of liberalisation on economic growth in the decade and a half following the reforms, the benefits are very much larger.
In sum, this evidence strongly supports the view that gradual reductions in wasteful subsidies and trade barriers, including barriers to migration, would yield huge benefits for little economic cost. At the same time, global inequality and poverty would be reduced. Although there might be some local social and environmental problems, these are usually tackled better and more cheaply by instruments other than trade barriers or subsidies. The most obvious way to achieve the benefits of liberalisation is via a successful conclusion to the Doha round of trade negotiations. If this does not happen soon, pressure for increased migration is to be expected, and a positive response to it could be hugely beneficial for the world’s poor. Such a response by rich countries to increase their intakes of migrant workers is not something that requires multilateral agreement, and so should be easier. Yet politicians are trying to keep migrants out, not let them in.
Anderson, K. and L.A. Winters (2008), “The Challenge of Reducing International Trade and Migration Barriers”, published by the Copenhagen Consensus 2008 project and also as CEPR Discussion Paper 6760, March.
World Bank (2006), Global Economic Prospects 2006: Economic Implications of Remittances and Migration, Washington DC: The World Bank.
1 This column draws from the authors’ paper for the Copenhagen Consensus 2008 (CC08) Project. The views expressed are the authors’ alone.