The payoff from globalisation

June 15, 2005

Free Market Foundation

After a steady half-century of trade liberalisation it is fair to ask, what do Americans have to show? As it turns out, quite a lot, says the Institute for International Economics (IIE).

Using four different methods, IIE researchers estimate:

The combination of shrinking distances thanks to container ships, telecommunications and other new technologies coupled with lower political barriers to international trade and investment generated an increase in U.S. income of roughly $1 trillion annually (measured in 2003 dollars), or about 10 per cent of gross domestic product (GDP).

Put another way, after a half-century of shrinking distances and commercial liberalisation, the average American household enjoys an income gain of about $10,000 per year.

Indeed, each of the four methods calculates that the payoff is very large:

The increase in U.S. income sparked by more intense trade with the world equates to 13.2 per cent of GDP.

Lower tariffs stimulate U.S. productivity through competitive forces and bring greater product choices to American producers and consumers; the estimate for these benefits comes to 8.6 per cent of GDP.

Researchers drew on a computable general equilibrium model to suggest how today’s economy would react to the Smoot-Hawley trading environment of the 1930s; that exercise gives an estimated loss of 7.3 per cent of GDP.

Finally, researchers calculated the productivity benefits arising from the use of imported components and find a benefit of 9.6 per cent of GDP.

While none of the four estimates is perfect, the broad result is clear: The benefits of trade and investment liberalisation are positive and large, says IIE.

Source: Gary Hufbauer and Paul L. E. Grieco, The Payoff from Globalization, Institute for International Economics, May 2005.

For text: http://www.iie.com/publications/papers/hufbauer0505.htm

For more on Benefits of Trade: http://www.ncpa.org/iss/tra/

FMF Policy Bulletin/ 07 June 2005