Tuesday, December 14, 2004

How much is free trade worth to Americans, in dollars?


Some of those who are sceptical about globalisation concede that rich countries, at least, gain from it. But many Americans, on recent evidence, seem unconvinced...

A new paper ... can help set them all straight. It surveys the evidence and puts a dollar figure on America's past and prospective gains from trade.

The authors draw on several approaches to estimate the total effect, because any single study is bound to be imprecise...

One method is to look at macroeconomic models of the effects of trade over time. The OECD has recently studied the impact of trade "exposure" on incomes per person in several countries. It concludes that trade accounted for 20% of the gain in America's GDP per person between 1950 and 2003.
My quick and dirty calculation makes that about $4,500 per person today, around $12,000 per household.
[Another] study cited by the authors suggests that, by bringing greater product variety, trade has boosted consumers' purchasing power by 2.8% of GDP, or $300 billion a year. On the corporate side, competition from abroad has induced changes in the mix of capital and labour and the incorporation of new technologies that raise productivity. Such “sorting and sifting” is reckoned to yield an additional 5.8% of GDP.

Combine the benefits of greater product variety and the gains from sorting and sifting, and the total impact of trade is to raise the level of GDP by 8.6%.
That's about $8,000 per household.
A third approach is to consider a counterfactual: what if the wave of global trade liberalisation that began after the second world war had never taken place? One study estimates that a return to 1930s-style protectionism today would reduce America's GDP by 2.4%. If other countries retaliated with higher barriers of their own, GDP would fall by 2.1% more. Once again, consumers' lost product variety would have to be considered too. On this method, the total value of trade to America is put at 7.3% of GDP.
Around $6,800 per household.
Taking the average of the estimates, the authors conclude that the American economy is roughly $1 trillion a year better off thanks to "global integration". That means about $9,000 of extra income for each American household.

... they use the same techniques to glimpse the effects of future liberalisation. Clearly, there are huge margins of error, but the gains look big: anywhere from $450 billion to $1.3 trillion annually, if America concluded free-trade deals with all its trading partners.

The authors think that this "final march" to freer trade could safely be expected to generate gains equivalent to about half of those already achieved, or around $4,500 per American household per year.

... they think the total economic costs of trade-related job losses if America eliminated all trade barriers would amount at most to $54 billion, far less than the economic gains.

Crucially, this is a one-time cost. The benefits of trade, by contrast, accrue year after year ...

~end quote~

[Economist/free access]
'Nuff said.