How to smite Smoot

How to smite Smoot

March 27, 2008 0 Comments

(March, 28, 2008) – Here is a great article in the current issue of the Economist that gives measures of the amount of GDP at stake in today’s battles over global trade and immigration. The numbers are huge! Worth thinking about. Click here to read the full article.

JR


IN JUNE 1930 the Smoot-Hawley tariff act turned a stockmarket collapse into a crippling, decade-long Depression. Now, politicians seem to be preparing for protectionism even while financial meltdown is going on. Barack Obama and Hillary Clinton vie with each other to be nasty about the North American Free-Trade Agreement. Last year the European Union dropped the principle of “free and undistorted competition” from its Lisbon treaty.

All the more reason, then, to welcome a study* by two eminent trade economists, Kym Anderson of the University of Adelaide and Alan Winters of the University of Sussex. They estimate the losses from such protectionism as already exists; calculate the potential gains that might accrue if—a big if—protectionist temptations were ignored and, more intriguingly, estimate the possible benefits if further migration were encouraged as well.

If you look just at merchandise trade barriers and farm subsidies, the authors reckon, the costs of trade distortion are running at almost $300 billion a year (that figure is the difference between what trade could be by 2015 without distortions and what it actually is, using 2005 as a baseline). This figure is sometimes bandied about at the Doha round of trade talks. It is, the authors reckon, a conservative one.

It assumes all industries respond to liberalisation in the same way, and that competition is perfect, which it is not. The authors show that if you use more realistic assumptions, estimates of the cost of protection actually rise from anywhere between $460 billion a year to over $2.5 trillion. (The wide range is the result of using “computable general-equilibrium models”, which are only as good as the assumptions you feed into them.) Whatever the exact amount, these are large sums and far greater than once-fashionable alternatives, such as bilateral deals.

But more trade in goods is only part of economic liberalisation. Another is trade in “factors of production”—like labour. The authors look at what might happen if the share of foreign workers grew to 3% of the labour force of rich countries. This would involve an increase, they say, of 14m people over 25 years (roughly 500,000 a year). The global gains, the authors reckon, would be $675 billion a year by 2025. Even if you subtract the cost of moving to the host country for immigrants and the social-welfare benefits they may get when they arrive, the net benefits are at least twice as much as a Doha agreement (and could be reaped by rich countries unilaterally, if they wanted).

John Rutledge

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