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Free trade benefits all
Question of the Day
Trade liberalization talks in Hong Kong ended with a deal to further liberalize access for poor countries' exports to rich countries' markets. Urged on by the misguided nongovernmental organizations, poor countries wasted an excellent opportunity to enhance their own prosperity by opening their markets to foreign competition, however.
Therefore, benefits of trade liberalization for many poor countries, especially those in Africa, are likely to be severely limited. So it is worthwhile to again restate the case for free trade and to back it with evidence countries open to trade tend to be more prosperous than protectionist countries.
There is ample evidence people have been trading with one another since earliest times. As economists James Gwartney of Florida State University and Richard Stroup of Montana State University put it in their book "What Everyone Should Know about Economics and Prosperity," the motivation for trade can be summed up in the phrase, "If you do something good for me, I will do something good for you."
There are three important reasons voluntary exchange is good not only for the contracting parties but the world as a whole:
(1) Trade improves global efficiency in resource allocation. A glass of water may be of little value to someone living near the river but is priceless to a person crossing the Sahara. Trade delivers goods and services to those who value them most.
(2) Trade allows partners to gain from specializing in the producing those goods and services they do best. Economists call that the law of comparative advantage. When producers create goods they are comparatively skilled at, such as Germans producing beer and the French producing wine, those goods increase in abundance and quality.
(3) Trade allows consumers to benefit from more efficient production methods. For example, without large markets for goods and services, large production runs would not be economical. Large production runs, in turn, are instrumental to reducing product costs. Lower production costs lead to cheaper goods and services, which raises real living standards.
Evidence supports the idea nations more open to trade tend to be richer than those that are less open. Columbia University economist Arvind Panagariya wrote in a paper "Miracles and Debacles: Do Free-Trade Skeptics Have a Case?": "On the poverty front, there is overwhelming evidence that trade openness is a more trustworthy friend of the poor than protectionism. Few countries have grown rapidly without a simultaneous rapid expansion of trade. In turn, rapid growth has almost always led to reduction in poverty."
According to the Cato Institute's 2004 report on Economic Freedom of the World, which measures economic freedom in 123 countries, the per capita gross domestic product in the quintile of countries with the most restricted trading was only $1,883 in 2002. That year's per capita GDP in the quintile of countries with the freest trading regimes was $23,938.
That statistic should be repeated to all those who used the Hong Kong meeting to push for liberalization in rich countries while arguing to protect poor countries' economies.
As the example of sub-Saharan Africa demonstrates, protection does not guarantee prosperity -- quite the opposite.
Under the World Trade Organization's "special and differential treatment" rule, many sub-Saharan African countries have been permitted to retain significantly higher import tariffs than rich countries. Combined with "preferential treatment" of their goods in rich countries' markets, sub-Saharan African producers enjoy a substantial advantage over other foreign competitors.
Result? According to the World Bank, Africa's share of world exports declined from 3 percent in 1970 to less than 2 percent in 2003. About 50 percent of sub-Saharan African exports come from a single country, South Africa. (It is worth noting South African import tariffs are substantially lower than those of other sub-Saharan African countries.)
Sub-Saharan African share of world exports, in other words, has been declining despite (or I would argue "because of") trade protectionism. Domestic producers, reliant on their captive domestic market to keep them afloat, see no need to make their products better and cheaper.
Shoddy goods and services abound throughout the developing world. And the poor suffer the most. Is that the outcome nongovernmental organizations, such as Oxfam, had in mind when they urged poor countries to retain their tariff barriers?
Marian L. Tupy is assistant director of the Project on Global Economic Liberty specializing in the study of Europe and sub-Saharan Africa at the Cato Institute.
By John McAfee
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