Liberating trade

How much damage does protectionism do to the world economy?

MERCANTILISM has been defunct as an economic theory for at least 200 years, but many practical men in authority remain slaves to the notion that exports must be promoted and imports deterred. Over 40% of the European Union’s budget is dedicated to defying Ricardo’s theory of comparative advantage, subsidising picturesque farms in Burgundy at the expense of efficient farms elsewhere. Tariffs of 500% on rice imports indulge Japan’s nostalgia for its lost agricultural past. And protectionists do not stop at subsidies and tariffs. To repel imports of Vietnamese catfish, American legislators were prepared to rewrite the laws of marine biology, the New York Times reported. Only the American variety could henceforth count as “catfish”, they ruled.

Because of such protectionist follies, many potential gains from trade pass unrealised. In a new paper for the Copenhagen Consensus project, Kym Anderson of the University of Adelaide attempts to count the costs of the barriers that block international trade and the subsidies that distort it.

Subsidies are a naked transfer from taxpayers to corporate mendicants; they are also an indirect transfer to overseas consumers, who enjoy artificially depressed prices as a result of the handouts. Tariffs on the other hand raise money for the treasury’s coffers at the expense of foreign exporters and home consumers, who face higher prices as a result of the restriction on trade. Do the gains to one group offset the losses to another? Emphatically not. Tariffs and subsidies drive a wedge between demand and supply, imposing “deadweight” costs on an economy. Tariffs discourage worthwhile production (of goods that would cost less to make than consumers are willing to pay), while subsidies encourage worthless overproduction (of goods that would cost more to make, sans the subsidy, than consumers are prepared to pay).

Eliminating such distortions would allow prices to resume their proper job of equating supply and demand. As a result, capital and labour would be reallocated across industries to reflect a country’s comparative advantage. The gains to the world economy would be sizeable: $254 billion per year (in 1995 dollars), according to a recent paper by Mr Anderson and his colleagues.

The bulk of the gains come from agriculture, which also carries the heaviest distortions. If the rich countries stopped intervening on behalf of farmers, the global economy would gain by $122 billion—and the rich world would benefit most of all, collecting $110 billion of those gains. Poorer countries, on the other hand, stand to gain the most, $65 billion, from liberalising their own trade regimes, not waiting for rich countries to free theirs. Indeed, some analysts fear that a repeal of agricultural handouts in the rich world could actually hurt the 80 or more poor countries that are net agricultural importers. Their terms of trade would deteriorate if the removal of subsidies raised the world price of agricultural goods. Mr Anderson, however, points out that poor households, if not poor countries, tend to be net sellers of food.

The economic case for seizing these gains is compelling; the political logic less so. The benefits of trade liberalisation are spread widely but thinly; the benefits of protectionism, on the other hand, fall heavily on small groups, such as Mississippi catfish farmers, prepared to lobby hard to retain their privileges. The World Trade Organisation (WTO) acts as a counterweight to such lobbying, and seeks to harness mercantilist tendencies for free trade ends. In WTO talks, countries negotiate for better access to overseas markets in return for letting imports move more freely past their own borders.

Unfortunately, the current round of trade talks at the WTO has stalled. What does the world stand to gain by reviving it? Estimates vary widely. An ambitious round that halved the legal limits for subsidies and tariffs might yield $188 billion per year, according to one estimate, provided some economies of scale remain to be exploited and some industry rents remain to be squeezed. But other calculations come out considerably higher. If the round sparked a thriving trade in services and a boom in foreign direct investment, the gains could be as great as $1 trillion, according to one model. Without standing on statistical ceremony, Mr Anderson simply splits the difference between these two estimates.