A Scorecard for Humanity: Trade Barriers, Anderson

Assessment Paper

A version of the working paper is available for download here. The finalized paper has been published in How Much Have Global Problems Cost the World? A Scorecard from 1900 - 2050 by Cambridge University Press.

An Assessment Paper on trade barriers was written by Kym Anderson and released as a chapter in How Much Have Global Problems Cost the World?

International trade is a rarely on lists of top humanitarian problems. But with its rapid trade-driven growth in the past 30 years, China allowed 680 million people to lift themselves out of poverty.

Throughout much of the twentieth century, strong trade restrictions, like the agricultural barriers and subsidies in Europe and the USA, with import duties nearly everywhere, held back prosperity.

We actually started the 20th century with relatively free trade: the total cost to humanity of trade restrictions was perhaps 3-4% of GDP. But after the 1929 crash and the Thirties depression, trade barriers shot up and the cost to humanity escalated beyond 10%.

After the Second World War, successive free trade rounds brought First World costs down to about 2% but the developing world has been much slower in reducing its obstacles, reaching 4% today.

The research reveals that more than half the cost to developing countries comes from their own policies: this sad fact also offers hope because unilateral action could reap half the potential benefits, without waiting for everyone else.

For the future, we can move towards more free trade and cut our annual losses to about half to 3% of GDP. But there is also a real risk of a return to the Thirties, again caused by recession, particularly among less-developed countries with most to lose.

Doing nothing would keep growth in the developing world down at about 1.4% a year but concluding the World Trade Organization's currently stalled Doha Trade Round would add another 0.2% -- yielding global annual GDP in 2020 of about $5 trillion more, with $3 trillion going to the developing world.

Short summary

The potential net economic and social benefits available to almost every country if they were to open their economies to international trade have been well known and clearly articulated since at least the 18th century. Yet national governments continue to intervene in markets for goods, services, capital and labor in ways that alter the location of production, consumer expenditure and thus also international commerce. Certainly transport and communication costs of doing business across borders have fallen enormously over the centuries, lowering natural barriers to trade. Governmental barriers to trade, however, have fluctuated widely around both upward and downward long-run trends.

The objectives of this chapter are three-fold: to review evidence on the changing extent of global trade restrictions resulting from government policies over the past 100+ years; to assess prospects for trade policy changes over coming decades, drawing on current political economy theory and evidence; and to estimate the annual cost in terms of economic welfare foregone in high-income and developing countries of those trade-restricting policies at various points in time retrospectively from 1900 and prospectively to 2050. 

To keep the task manageable, attention is initially confined to restrictions on goods trade, leaving aside until the end the less-certain effects of barriers to trade in services including financial flows.  This is necessary because methods for estimating the extent of (let alone the market and welfare effects of) barriers to services and capital flows between countries are far less developed than methodologies applicable to trade in goods. Preliminary studies to date to fill these lacunae suggest, however, that potential gains from just goods trade reform today are very much lower than the gains that could come from removing barriers for all products and financial flows. A sample of these studies is reviewed in the Appendix, and the penultimate section of the chapter provides an indication of how much greater the global cost of trade barriers could have been at different points in time with this more-comprehensive coverage of trade barriers.

There is a paucity of detailed historical data even on goods trade restrictions. There are also virtually no global economy-wide models capable of estimating costs of distortions through most of the previous century. Precision about the past is therefore impossible. Also, there is a broad range of projections of the world economy available for coming decades, and each of them depends on explicit or (most commonly) implicit assumptions about future trade and other economic policies. Hence even baseline shares of different countries in global GDP and trade in 2050, let alone projected trade barriers, have an unmeasurable but wide confidence band around them. The use of global economy-wide models in estimating the costs of trade-distorting policies has grown considerably in recent years though, so estimates of the cost of at least recent policies are available. They will be drawn on for their own sake, and also for providing guidance in estimating past and future costs. 

The chapter begins, by way of background, with a brief history of trade policy and institutions. It then examines the changing extent of barriers to international trade in various parts of the world from the late 19th century to the present. That survey reveals the ups and downs of trade taxation over the past 100+ years. In the following section, a series of estimates of the global cost of trade barriers is presented: for 2004, for 2050 under two alternative scenarios (high and low protection) for 1980-84, and for earlier decades of the 20th century. The penultimate section of the chapter then explores how much those estimates might need to be adjusted to account for missing elements of the calculus, which are identified in the review of recent literature summarized in the Appendix. Those two sections provide the basis for the estimates reported in the final section of the costs of those changing trade barriers, expressed as a percentage of GDP in high-income countries, developing countries and globally. 

The results suggest that while their cost may have come down over the past six decades, they are still high compared with those in 1900 (when transport costs were a more-important barrier to trade – see Jacks, Meissner and Novy 2010 and Jacks and Pendakur 2010). The results also reveal that their cost may not fall significantly over the next four decades unless a comprehensive liberalization is agreed to under the current Doha round of multilateral trade negotiations by member countries of the World Trade Organization (WTO). The chapter therefore concludes by exploring possible strategies to reduce remaining distortions over the next four decades. The most obvious of them is unilateral reform, but governments find it difficult politically to ignore protectionist lobbies unless there are counter-lobbies from other groups, such as exporters. Hence the on-going effort to reform in concert with other countries, including multilaterally via the WTO’s Doha Development Agenda but also via new or expanding preferential trading agreements.