Thursday, 31 October 2013

WORLD-ECONOMY: Why Free Trade?

Free trade has for a decade been languishing among many more interesting, global issues. This is wrong, because free trade might just be one of the best ways to help the world foster economic prosperity and development.

Yet recently, free trade has been getting more attention. British Prime Minister David Cameron has rightly put free trade on the top of his G8 agenda. And in past weeks, the EU and the US were going to continue their negotiations in Brussels towards a Transatlantic Trade and Investment Partnership. This however had to be postponed due to the US administration shutdown.

But why free trade? David Cameron explained in the run-up to the past G8 summit that comprehensive free trade “could boost the income of the whole world by more than $1 trillion.” As it turns out, this is likely a serious understatement.
We wouldn’t have to reinvent the wheel
The classic argument for free trade points out that specialization and exchange benefits everyone, because goods are produced by the countries that specialize in those goods and produce them most efficiently. The standard World Bank models show that realistic free trade would, even just by the end of this decade, increase global GDP by several hundred billion dollars per year, with perhaps $50 billion accruing to the developing countries. Towards the end of the century, the annual benefit will likely exceed Cameron’s $1 trillion annually, with half of that going to the developing world.

But a growing number of academic studies now show that the free trade story goes much further than simple specialization. History shows that open economies grow faster. Good examples include South Korea from 1965, Chile from 1974 and India from 1991 onwards, which all saw their growth rates increase significantly after liberalization (although in Chile’s case it also involved an unwelcome military dictatorship). Even modestly freer trade helps domestic markets become more efficient and get supply chains better integrated. At the same time trade transfers knowledge, which spurs innovation. Free trade means we don’t all have to reinvent the wheel over and over again.

This is perhaps best captured in a recent state-of-the-art literature review by Professor Kym Anderson for the Copenhagen Consensus Center. Anderson, one of the World Bank’s lead modelers, shows that the long-run benefits from even a modestly successful Doha free trade round would be vast. The annual GDP, when compared to a no extra free trade scenario, would in 2020 be about $5 trillion larger, with $3 trillion going to the developing world. Towards the end of the century, slightly higher growth rates will have accumulated to benefits exceeding $100 trillion annually, with most of it going to the developing world. By then, benefits would add about 20% annually to the developing world GDP.

Even the much more modest EU-US free trade agreement would cause an impressive impact. A recent study conducted by Bertelsmann Foundation shows that EU GDP would increase 5 percent as a consequence of transatlantic free trade, with the German economy growing 4.68 percent. Across sectors, 160,000 additional jobs would be created in the German labor market only. Wages would almost universally increase, with the low-skilled workforce profiting most (+0.9%).

It is hard to imagine that any other policy would generate more prosperity and development in the world. Compare this to the common promise to fight global warming. Even if political leaders could be successful – which they have not been in the past – economic models show that they would only avoid a fraction of one percent of GDP damages towards the end of the century. An outcome much less beneficial, much less achievable and likely but with an astonishingly higher price tag.

While the benefits of global free trade seem so starkly obvious to the world, it is also clear that vested interests, especially in agriculture, fight for their privileges. About 40 percent of government expenditure on global subsidies goes to agriculture. Despite farmers comprising only a very small proportion of the population in developed countries, agricultural interests seem to have a stranglehold over OECD governments to keep their $252 billion in annual support.

Protecting inefficient agriculture from competition may seem politically convenient but it has huge costs. It means higher food prices, which harms consumers. And it ignores one of the most amazing opportunities to grow the developing world and ensure development.
A monumental legacy for politicians
Yet, there are many reasons why we need to get farmers and others off subsidies. Even with austerity, the EU’s Common Agricultural Policy makes up the biggest share of the EU budget, costing 363 billion euro between 2014 and 2020. The upcoming US farm bill might waste $950 billion over the next decade. Here, our politicians should take the creative and courageous steps necessary.

For example, they could compensate entrenched interests for their losses over the next decade or two, while it phases out subsidies and other trade distortions. This cost would run to another $50 billion per year globally, but would be a miniscule price to pay for the benefits yielded by free trade – for every dollar spent, the world would see much more than a hundred dollars of long-term growth benefits.

Kick-starting not only the transatlantic but also the global free trade agenda would be an ambitious and monumental legacy for our current politicians. The vast majority of the world’s people would benefit from free trade – not just today but also tomorrow. We have the opportunity to help the world’s poor, and ourselves, if we can just muster the courage.

By Guylain Gustave Moke
Political Analyst/Writer
Investigative Journalist

Photo-Credit: AFP- This year G8 Free Trade Summit photo-Canada Prime MinisterStephen Harper, FRench President Francois Hollande & US President President Barack Obama