Tuesday, 22 April 2008

Gains from trade

At the moment the prospects for liberalisation of barriers to international trade and migration seem dim. A question that we should ask is What are the costs to not liberalising? What gains are we forgoing by not liberalising? In an article at VoxEU.org, Kym Anderson and L Alan Winters try to answer this question.

In their article, Now is the time to reduce international trade and migration barriers, Anderson and Winters point out that
[t]he 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.
They also look at gains from the movement of 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.
They also go on to look at the WTO’s Doha round of multilateral trade negotiations. Estimates of the net benefits from a permanent partial reform of goods trade barriers and farm subsidies, and those from expanded migration over the period to 2025, show that
... 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 short, this evidence shows that gradual reductions in wasteful subsidies and trade barriers, including barriers to migration, would yield huge benefits at little economic cost and would at the same time reduce global inequality and poverty. Can this be bad? Then why don't politicians let it happen?

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