Gary Hufbauer and Matthew Adler attribute 25% of US merchandise trade growth since 1980 to policy liberalisation. More surprisingly, they attribute only 3% to falling transportation costs. The rest? “The general expansion of the world economy,” a.k.a. the residual.
Their paper isn’t up on the web yet; I’ll have more comments once I see their methodology.
I am more concerned about economic losses, policy coordination, and other high-probability costs, but Ed Glaeser is making the less-traditional case that protectionism risks increasing the likelihood of war by eroding democracy in developing countries:
Democracy is bolstered by prosperity and damaged by downturns. Since the pioneering work of Martin Lipset 50 years ago, social scientists have tried to understand why democracies and wealth go together. My colleague Robert Barro found that this link exists not because democracies increase prosperity, but because prosperity supports democracy. The appeal of democracy’s enemies increases when democracies, like the Weimar Republic, are unable to deliver economic success.
Trade is crucial for the prosperity of the world’s poorer countries, especially during a downturn. My own research finds little connection between trade and economic growth among rich or middle-income countries, but in the poorest places, where democracies are least stable, a 20 percent drop in the ratio of trade to GDP is associated with per capita incomes growing by 1 percent less per year. Reductions in trade had a devastating impact on Argentina in the 1930s, ending decades of democracy and ushering in a long period of dictatorship and political turmoil.
Free trade brings prosperity to the world’s poorer countries, strengthening their transitions to democracy and making their citizens, and us, safer. But the United States is now contemplating policies that threaten our ability to argue that an economically connected world is stronger and safer.
Ernesto Zedillo wants to raise the stakes in our efforts to fight protectionism amidst the global crisis:
Of course, pledges to avoid protectionism by leaders or other high-level officials are always welcome, but as recent events have shown, sooner rather than later, those pledges are blown away by the wind of domestic political pressures and there remains little of practical value.
The only thing that will make leaders think twice about whether or not to fall into the temptation of pleasing a particular constituency with protectionism will be the possibility that, as a consequence of such an action, another of its political constituencies will end up being seriously hurt. This possibility will make dubious the net political benefit of walking the protectionist tightrope.
What I am suggesting is that pledges by countries to use whatever legal means they have at their disposal to retaliate against others for protectionist actions that harm their exports will prove far more effective than their own pledges not to introduce new trade barriers. Interestingly, a credible pledge to legally retaliate for others’ protectionism does not need to be the result of collective action, unlike the case of a pledge to avoid new trade barriers. All you need is one major trade partner to commit to retaliation for others to follow suit.
If a leader of a trading power is convinced that worldwide protectionism will make of this crisis an even worse disaster, then, in addition to resist domestic pressures for higher trade barriers, that leader should firmly declare that any new action restricting access of his country’s exports to any foreign market shall lead to retaliation against the export sectors of the trade transgressor…
Needless to say, I am not arguing for the convenience of a nasty trade war. What I am submitting is that if you want to prevent one, it’s better to make the potential contestants aware of the full cost of their own folly starting from day one. In other words, let’s use whatever tools the system has in order to make clear to whoever decides to ride the protectionist wagon that there will be no such a thing as a free ride, but rather that there shall be blood. In short, let the WTO’s teeth bite!
That’s from a new book released today, “The collapse of global trade, murky protectionism, and the crisis: Recommendations for the G20,” edited by Richard Baldwin and Simon Evenett. It includes contributions from Anne Krueger, Jagdish Bhagwati, Peter Gallagher, and many others. Weighing in at over 100 pages, it has plenty for trade policy wonks to chew on.
Who has the most freedom to travel? Note that this index is a function of both foreign countries welcoming visitors and source countries allowing their citizens to depart freely.
HT: Wilkinson
Two weeks ago, I suggested that Peter Singer erred by suggesting that “economic development is impeded more by a lack of appropriate motivation than a lack of appropriate knowledge and incentives.” I predicted that he’d be due some grief from Bill Easterly. Such is the power of Trade Diversion that that has now come to pass in the pages of the Wall Street Journal:
Suppose you see a small child drowning in a pond. If you save him you will ruin your expensive suit. Do you save him? Of course you do. Now think about the world’s extremely poor children who are going to die unless you give enough to a charity designed to help them, such as Unicef or Oxfam. Do you save them? Not often enough. In “The Life You Can Save,” Peter Singer argues that the two situations are ethically equivalent. Such immediacy is compassionate and inspirational — you want to give more after reading Mr. Singer.
Unfortunately, there are several differences between these two situations. The most important is that you know exactly what to do to save the child, whereas it is not at all clear that you (or anyone else) knows exactly what to do to save the lives of poor children or how to get them out of extreme poverty. Another difference is that you are the one acting directly to save the drowning child, whereas there are multiple intermediaries between you and the poor child — an international charity, an official aid agency, a government, a local aid worker.
The full review goes into more details, but Easterly’s argument is simply that Singer doesn’t address these two problems adequately to compellingly show that greater giving is a moral obligation akin to saving a drowning child.
Bombardini and Trebbi: “The data show that sectors characterized by a higher degree of competition (more substitutable products and a lower concentration of production) tend to lobby more together (through a sector-wide trade association), while sectors with higher concentration and more differentiated products lobby more individually.”
This big paper by Angus Deaton on “instruments of development” is really good. In short,
Welcome ECIPE (Razeen Sally, Fredrik Erixon, et al.) to the trade blogosphere.
I apologize for the lack of activity at Trade Diversion recently. Posting should increase after my midterm exams next week.
Pascal Lamy says that protectionism cannot be smart.
William Easterly says that free markets are underappreciated.
The stimulus bill dictates that firms receiving bailout money not use any of it to hire workers on H-1B visas. And now Senators Grassley and Durbin want to make it harder to obtain H-1B visas. Durbin: “The H-1B program can’t be allowed to become a job-killer in America.”
Trade Diversion 