A Trade War On the World’s Poorest
New obstacles to free trade not only make the world less secure. Protectionism also undermines the best opportunity to transform the lives of billions of the world’s poorest people and realize benefits worth trillions of dollars every year.
PRAGUE – US President Donald Trump’s steel tariffs have brought the prospect of a trade war closer to reality. The European Union warns that it has “a whole arsenal at our disposal with which to respond,” while China threatens “a justified and necessary response.”
Economists, politicians, and public figures have all raised concerns about the threat of tit-for-tat trade barriers. But it is difficult to overstate the potential damage. New obstacles to free trade not only take us in the wrong direction; they also undermine the best opportunity to transform the lives of billions of the world’s poorest people and realize benefits worth trillions of dollars every year.
It is reasonable to point out that freer trade does have costs. Much of the sentiment expressed by political leaders today – which has much in common with that underlying the intense anti-trade protests of the 1990s – reflects the reality that every trade deal costs some people their jobs, and that some of the displaced will not find other work.
The negative effects have often been concentrated in particular industries and geographic regions (such as the historically industrial Rust Belt of the United States), where manufacturing can be costlier and less efficient than in other countries. One study suggests that if the costs of these effects are added up, they effectively offset more than one-fifth of the overall benefits from trade.
But, while this needs to be taken into account, it is just one part of a bigger picture. Nowhere are the benefits of freer trade more evident than in the world’s marketplaces and stores. Whether in Nairobi, Shanghai, Pittsburgh, Lisbon, or Melbourne, consumers find a much wider variety of goods, at cheaper prices, than any one country could produce alone.
These cheaper imports ease inflationary pressure. In the US, it has been estimated that for every 1% market share gained by imports from low-cost producers like China, prices fall by 2%.
And cheaper goods mean that our money goes further. According to a 2015 report for the White House, middle-class Americans can buy 30% more for their money than if there were no free trade. This boost to purchasing power is even more pronounced for the poorest tenth of US consumers, who can buy 60% more than they would otherwise be able to afford. The US working class, which is being promised benefits from trade barriers, would actually be hardest hit by a trade war.
But the benefits of free trade are far broader than our ability to purchase cheaper appliances and food. Globally, free trade is far and away the most powerful development tool ever devised. Freer trade across borders reduces income disparities. The 2015 White House report, for example, found that a ten-percentage-point decrease in tariffs leads to a one-percentage-point drop in the wage gap between men and women, and that lowering tariffs also reduces wage gaps based on race and immigration status.
Moreover, increased openness to trade is associated with lower rates of infant mortality and higher life expectancy, especially in developing countries. Over time, free trade enables workers to shift to more efficient industries, resulting in higher wages, increased investment in infrastructure, and a more dynamic economy. Most powerful of all, free trade underpins economic growth, which means millions more people lifted out of poverty.
Some fear that the benefits of economic growth accrue to just a few oligarchs. But, for all of the talk of inequality and fears that the benefits of growth are not “shared,” World Bank research has shown that when economies grow, poor households’ income rises in direct proportion to overall income growth.
Recent history demonstrates the benefits of opening economies to freer trade. Amazingly, over the past 20 years, the proportion of the world’s population living in extreme poverty has been nearly halved. As Oxford University economist Max Roser points out, newspapers could have published the headline, “People in extreme poverty fell by 137,000 since yesterday,” every day for the past 25 years.
Simply put, free trade achieves more good for the planet than any other single policy, program, or project anywhere. The real tragedy in current events, then, is that the world is moving further from a freer, more prosperous future.
Research commissioned by my think tank, Copenhagen Consensus, finds that completing the Doha Round of global free-trade talks – a prospect that still seemed possible just a few years ago, but is now almost unimaginable – would reduce the number of people living in poverty by 145 million in 15 years and make the world $11 trillion richer. Three-fifths of this wealth would go to developing countries, equivalent to an extra $1,000 per person every year by 2030. Even if one-fifth of these benefits were eroded by the costs of redistribution, this would still amount to $9 trillion in benefits to humanity.
So, by all means, governments should spend more helping the losers of free-trade deals with job training and transitional social welfare. But ignoring $9 trillion of benefits because of damages worth $2 trillion makes no sense at all.
In 1824, the British historian Thomas B. Macaulay observed that “free trade – one of the greatest blessings which government can confer on its people – is in almost every country unpopular.” Since 1820, global poverty has dropped from 94% of humanity to less than 10% – largely because of free trade. Yet, even today, railing at free trade is sufficiently popular that the Trump administration can start eroding one of the best development policies possible. This needs to stop. The relatively small and correctable losses from trade must not be allowed to overwhelm the enormous benefits it brings.