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The Free-Trade Miracle

PRAGUE – Global free trade provides the greatest opportunity to improve human welfare over the next decade and a half. It has already helped lift more than a billion people out of poverty over the past quarter-century. Lowering trade barriers even more could double average incomes in the poorest parts of the world over the next 15 years.

Yes, there are costs to free trade that must be better addressed; but the costs are vastly outweighed by the benefits. Yet, in rich countries today, the mood has turned against free trade. That is a tragedy.

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Nowhere is opposition to free trade louder than in the United States. Regardless of who wins next month’s presidential election, a free-trade skeptic will occupy the White House. Both Hillary Clinton and Donald Trump oppose the biggest trade initiative launched by President Barack Obama’s administration – the Trans-Pacific Partnership (TPP) with 11 other Pacific Rim countries – and both would revisit the North American Free Trade Agreement (NAFTA), which has been in force since 1994.

The other major Obama-led trade initiative, the Transatlantic Trade and Investment Partnership (TTIP) between the US and the European Union, is all but dead, crippled by opposition on both continents and by the UK’s Brexit referendum result, widely interpreted as a vote for protectionism.

Meanwhile, protests opposing free-trade deals are drawing political support and crowds in Germany, Belgium, Canada, Sweden, New Zealand, Australia, and elsewhere.

More than rhetoric has shifted. One study found the use of protectionist policies up 50% in 2015, outnumbering trade-liberalization measures by three to one. Members of the G20 – the world’s major advanced and emerging economies, representing more than four-fifths of global GDP and three-quarters of trade – were responsible for 81% of the punitive measures.

Politicians in rich countries tap into understandable public fear. A trade deal creates adjustment costs concentrated in particular areas, like the US Midwest and South, where manufacturing can be costlier and less efficient than overseas. Shuttered factories serve as highly visible, totemic warnings against open borders.

The far greater benefits of free trade are much less obvious. Consumers get a wider variety of goods at cheaper prices. Middle-class Americans gain an estimated 29% of their purchasing power from foreign trade. In other words, the average middle-class American can buy 29% more for each dollar than if there was no trade. The effect is even bigger – 62% – for the poorest tenth of American consumers.

Trade makes exporters stronger, more efficient, and more productive. The benefits are shared among workers: Obama’s Council of Economic Advisers found that, on average, US export-intensive industries pay workers up to 18% more than non-exporting firms.

Opposition to free trade ignores our interconnected reality. Some 80% of trade happens along supply chains within or organized by transnational firms, according to a 2013 UN report. While some US politicians call for tariffs against Mexico, the National Bureau of Economic Research estimates that about 40% of the value of Mexican imports to the US is actually added within the US itself.

These arguments are all part of the overwhelming economic case for free trade. But the strongest argument is a moral one. Cost-benefit analysis shows that freer trade is the single most powerful way to help the world’s poorest citizens.

Reviving the moribund Doha Development Round of global free-trade talks would reduce the number of people in poverty by an astonishing 145 million in 15 years, according to research commissioned by the Copenhagen Consensus Center. The world would be $11 trillion richer each year by 2030, with $7 trillion going to developing countries – equivalent to an extra $1,000 for every person every year in these countries by 2030.

Moreover, trade also carries much broader benefits for society. Economic globalization has been shown to reduce child mortality and extend life expectancy, owing to increased incomes and better information. In the US, trade over the past half-century has increased longevity significantly. In Uganda, freer trade in the past 35 years has been shown to lengthen the average lifespan by 2-3 years.

What’s more, “free trade is good for the environment,” to quote one academic study. This may seem counterintuitive. But, although each 10% increase in production leads to 2.5-5% more pollution, the higher income from this output drives better technology and more stringent regulations, which in turn reduces pollution by 12.5-15%. In total, a 10% increase in income results in 10% less pollution. This finding is supported by a study concluding that “trade tends to reduce three measures of air pollution.”

At the same time, free trade has been shown to create more jobs for women, reduce employment discrimination, and improve human-rights conditions.

Of course, not everyone benefits from freer trade. Some people lose their jobs, and some of them will struggle to find other work. But it is important to have a sense of the size of the problem.

One recent study suggests that free trade increases income inequality, and the cost of redistribution could erode upwards of 20% of the gains. This indicates we should be willing to spend perhaps 20% of trade benefits on helping the losers from trade deals, through job training and transitional social-welfare benefits to ameliorate the risks.

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But it also shows that 80% of the benefits stand – and 80% of $11 trillion is still a whopping $9 trillion in benefits to humanity – on top of a reduction in lower poverty, child mortality, and pollution, higher life expectancy, and less gender- and race-based discrimination.

While the US presidential candidates have adopted protectionist rhetoric, so, too, did Obama as a candidate in 2008. Yet he became an enthusiastic advocate of free-trade deals, especially in his second term. Trade, he says, “has helped our economy much more than it has hurt.” As he leaves office, he has declared this an area of “unfinished business.” So it should be for us all, if we focus less on fears and more on facts.