Monday, December 1, 2008

Benefits of free trade and the ineffective marginal change in tariff rates

Are the benefits of free trade exaggerated? Consider this excerpt from a piece in Newsweek:

"World trade is already so free, we're really talking about stuff at the margins," says Paul Krugman, a Princeton economist and this year's recipient of the Nobel Prize. "Once you are down to tariff rates as low as we have now, a few points up or down doesn't make much difference." Just as important, free-trade deals don't come cheaply; the world might be far better off spending its political capital on projects with a bigger bang-to-buck ratio.

…Cutting tariff barriers in half yields a lot of wealth and growth when their starting level is 150 percent. But today import tariffs on manufactured goods are about 5 percent in developed countries and 10 to 20 percent in developing countries; they've declined on average by 34 percentage points since the mid-1980s. Now a 50 percent cut in tariffs would yield little more than pats on the back for the world's trade negotiators.

…In a 2005 study, the World Bank reported that if trade were completely liberalized overnight, and agricultural subsidies (a sticking point in the Doha talks) completely eliminated, the world would be better off by about $287 billion by 2015—an increase of just 0.7 percent of global GDP. The benefits from the Doha round, which has humbler goals than complete liberalization, are far lower, ranging from as much as $119 billion to as little as $18 billion. The latter number represents just 0.04 percent of GDP.

…if the OECD countries let in just 14 million additional migrants by 2025—that's about 700,000 extra migrants a year, spread across the entire rich world—the global economy would be better off by $356 billion. By comparison, if the world could completely eliminate agricultural barriers, the benefit would amount to barely half that: $182 billion.