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June 13, 2005

Payoffs From Globalization

Gary Clyde Hufbauer and Paul L.E. Grieco say:

The Payoff From Globalization: There is no question that trade liberalization creates winners and losers. Affected citizens and companies have every right to plead their case. But Congress should consider how freer trade affects the nation as a whole. Since World War II the United States has led the international quest to liberalize world trade and investment. With leadership from the White House, Congress has slashed the simple average tariff rate from 40 percent in 1946 to 4 percent today, and other industrial nations have done much the same. After a half-century of steady liberalization it is fair to ask, what do Americans have to show?

As it turns out, quite a lot. Using four different methods, we estimate that the combination of shrinking distances -- thanks to container ships, telecommunications and other new technologies -- and lower political barriers to international trade and investment have generated an increase in U.S. income of roughly $1 trillion a year (measured in 2003 dollars), or about 10 percent of gross domestic product. This translates to a gain in annual income of about $10,000 per household.... Americans do not receive this money as a check marked "payoff from globalization." Instead, the payoff is hidden within familiar channels: fatter paychecks, lower prices and better product choices....

First, we... correlate the expansion of international trade with economic growth... the increase in U.S. income sparked by more intense trade equates to 13.2 percent of GDP.... [S]econd... we calculate how lower tariffs stimulate U.S. productivity through competitive forces and bring greater product choices... 8.6 percent of GDP. Third, we draw on a computable general equilibrium model... 7.3 percent more in GDP.... Finally, we calculate the productivity benefits arising from use of imported components... 9.6 percent of GDP....

[O]ur estimates of future policy liberalization alone (excluding likely benefits from better communications and transportation) indicate that a move from today's commercial environment to global free trade and investment could produce an additional $500 billion in U.S. income annually, or roughly $5,000 per household each year... services, agriculture, transportation and trade with developing countries.... Despite the huge payoff to the United States, maintaining political support for trade liberalization has never been easy. Poli Sci 101 gives the explanation: Large gains are widely dispersed, and much smaller private losses are highly concentrated... 225,000 trade-related job losses per year... some are unemployed for an extended period. Even workers who are re-employed may face significant pay cuts... lifetime costs... $240,000 per affected worker. This is a huge loss on a personal level, but only about 5 percent of the annual national gains.... [S]trident opposition to CAFTA from sugar barons....

The federal government spends less than $2 billion per year helping trade-dislocated workers. Over the past decade, the Organization of Economic Cooperation and Development estimates that U.S. government policy has boosted domestic farm incomes by an average $40 billion per year.... Given the enormous dividends from international trade, more should be done for workers forced to bear the burden of economic adjustment...

Posted by DeLong at June 13, 2005 07:31 PM