Trade

Why supporting more trade should get back into fashion

Supporting free trade is out of fashion. In rich countries it has been blamed for job losses and all-but-abandoned by policymakers. Over the past century, trade had been increasing as a percentage of the entire global economy, but this peaked during the Global Financial Crisis, and is now declining. This is regrettable because ensuring freer trade turns out to be one of the world’s best development policies.

It has been known for centuries that trade lifts incomes because it allows a nation to specialize and produce effectively what it does best. One study finds that trade makes us all 27% richer, meaning that countries on average have incomes nearly one-third higher than in a world with no trade.

Trade doesn’t just lift average incomes. It also helps lift the world’s poor out of abject poverty. One of the most highly cited recent studies finds that the incomes of the lowest 20% grow as fast as the average.

We have seen this clearly in the world’s two most populous nations, China and India. As China’s trade soared, incomes rose seven-fold and extreme poverty declined from 28% to near-zero today. India has experienced a similar, if more muted trajectory: when tariffs were reduced from a stifling 56% in 1990 to 6% in 2020, average incomes rose almost four-fold and extreme poverty declined from 22% to 1.8%. We have seen similar trajectories for other fast-growing countries like South Korea, Chile, and Vietnam. Prosperity from trade really is shared.

It is little wonder then that achieving freer trade is one of the promises that world leaders signed up for with the so-called Sustainable Development Goals for 2030. Unfortunately, the world is failing spectacularly at delivering on this. Measuring progress toward free trade, on current trends we are likely to be about half a century late.

It is no secret why. The world has promised everything to everyone, and the list of promises runs to 169 targets. Having 169 priorities is like having none at all. The list has plenty of core targets such as increased trade, the eradication of infant mortality, better schooling, and the elimination of war and climate change. But simultaneously it includes well-intentioned but much more peripheral targets like boosting recycling, more urban parks, and promotion of lifestyles in harmony with nature.

This year the world is at halftime for the Sustainable Development Goals, but we are nowhere near halfway. It’s clear the world can’t do everything, so it is time to identify and prioritize the most crucial goals. My think tank, the Copenhagen Consensus, is doing exactly that: Together with several Nobel laureates and more than a hundred leading economists, we have been working for years to identify where each dollar, rupee, or shilling can do the most good.

One of our new studies shows why free trade should be at top of the global agenda. The research takes into account the problems of job losses highlighted by rich-world politicians. It maps out how much additional cost freer trade imposes on these workers through losing their jobs, needing to reskill (often to lower-paying jobs), or leaving the job market altogether.

But the study also uncovers the advantages of more trade, in higher incomes and the consequent improvements to the world’s poor, making it possible for us to weigh both the costs and benefits of freer trade. The study is ground-breaking, because it offers the first attempt ever to establish costs and benefits not just at the global level, but for the world’s rich and poor.

Based on the best evidence, the research finds that the “cost” of free trade for each import-exposed worker (such as a car factory line worker in Detroit, perhaps) varies with the amount of imports within their line of work. For every thousand dollars of additional imports per worker, the loss of earnings and increased risk of unemployment add up to a reduction worth almost one percent of the worker’s wage.

The economic model shows that if we grow global trade by five percent, the present-day cost for all workers across the entire world into the future would be one trillion dollars. This cost certainly justifies the concern of populist politicians. Yet, the benefits to mankind turn out to be $11 trillion, making this a very good deal for the world.

The people who are hurt by free trade should be helped more by governments around the world, but the significant surplus from freer trade not only provides a pot of money to do so, but also leaves over an enormous development opportunity to lift incomes and people out of poverty.

The new model also shows who bears the costs, and demonstrates why rich countries have cooled most on trade. Because rich countries make up the larger part of the global economy, they gain 60% of the $11 trillion. But they suffer more than 90% of the costs. While this validates some political concerns, it misses the larger picture: rich countries gain $7 for every dollar of costs.

And it entirely neglects how good trade is for the poorer half of the world. Their costs are quite minimal at $15 billion, but benefits run far beyond a trillion dollars. Each dollar of loss delivers a phenomenal $95 of long-term benefits, increasing incomes and driving down poverty.

If we are serious about the Sustainable Development Goals, we need to recognize that freer trade is one of the most amazing ways to deliver better lives and incomes. Governments need to focus more on the people who lose out, but trade is good for rich countries and phenomenally good for the world’s poor.