The Exaggerated Impact of Trade

I just stumbled on an old paper from the Center for Economic and Policy research arguing that the gains from trade liberalization are often overstated. One major reference, for instance, had indicated that trade liberalization by rich countries would lift 540 million people out of poverty worldwide. But as it turns out, the calculations here were slightly askew. The CEPR researchers find that the gains here are much more marginal: most of the people “lifted out of poverty” would see their incomes rise from just below $2 a day to just above that level.

Now that’s not nothing, and the arguments in favor of trade liberalization are still quite good: the paper’s not saying that it would be harmful for rich countries to reduce their barriers. What it does imply, though, is that this isn’t a goal worth doing anything under the sun to pursue. Many liberal opponents of the Dominican Republic-Central American Free Trade Agreement (DR-CAFTA)—me, for instance—have noted that the benefits from the trade provisions in the bill are often swamped by the harmful effects due to the various intellectual property protections—for instance, the restrictions on generic drugs that would make AIDS medication more costly—and the weakening of labor standards. (Not to mention the fact that the agreement gives serious trade protection to American sugar producers.) Indeed, economists like Richard Freeman have often argued that trade just isn’t all that consequential in the grand scheme of things: certainly not as important as immigration, capital flows, or technology transfers. That applies to CAFTA too.

Now some free-traders acknowledge that those are bad aspects of CAFTA, but think we should just ignore those objections because the upside to reduced tariffs is so high. But if CEPR’s figures are right, the upside to reduced tariffs, while decent, isn’t that high, and piling on concessions to the pharmaceutical and telecommunications industry really do, on average, make the bill a net negative. This applies to the recently-signed US-Australia free trade deal, which had a lot of harmful non-trade provisions, and it’s going to continue to happen so long as people believe that liberalization is such a good deal for poor countries that it should be pursued at all costs.