Free trade could make everyone in the world richer

The Post-2015 Consensus' seventh set of papers unpick the argument that promoting free trade as a target for the post-2015 development agenda could make everyone in the world richer.

With one simple policy – more free trade – we could make the world $500 trillion better off and lift 160m people out of extreme poverty. If there is one question we have to ask ourselves, it is: why don’t we?

As argued in a new paper written for the post-2015 consensus project by professor Kym Anderson of the University of Adelaide, reducing trade barriers not only makes the world richer, it is a great enabler for reducing poverty, curtailing hunger, improving health, and restoring the environment.

Freer trade essentially means that each country can focus on doing what it does best, making all countries better off. Big strides have been made in liberalisation since the Second World War, but the latest phase – the Doha Development Agenda – seems stalled, with little hope of a resolution. This is dreadful, particularly for developing countries, because two of the main areas where agreement is elusive are agriculture and textiles, both sectors where lower wage countries in the tropics and sub-tropics have a comparative advantage.

So, what’s the smartest post-2015 target for trade?

Implementing the Doha Development Agenda which would make the world $500 trillion dollars richer and by 2030 lift a staggering 160 million more people out of extreme poverty.

Analysis shows that there would be substantial rewards for completing the Doha round. The direct economic benefits would be a 1.1 per cent increase in global GDP. This sounds modest. But because it would impact the entire world economy, by 2030 we would be about $1.5 trillion richer every year.

But open economies also grow faster. In the last 50 years, countries as diverse as South Korea, Chile and India have seen their rate of growth shoot up by 1.5 per cent per annum on average, shortly after liberalisation. If Doha can be completed, it is estimated that the global economy will grow by an extra 0.6 per cent for the next few decades. By 2030, such dynamic growth would make the world economy $11.5 trillion larger each year, leaving us 10 per cent more resources to fix all other problems.

And a large part of the benefit will go to the developing world, which by 2030 would see its economy $7 trillion larger each year. On average, this increased GDP is equivalent to $1,000 more for every person in the developing world.

By the end of the century, free trade could leave our grandkids 20 per cent better off, or with $100 trillion more every year than they would otherwise have had.

For now, powerful vested interests make it hard for politicians to compromise. The jobs that are lost from free trade are obvious and concentrated – witness Western farmers protesting losing their subsidies. But the benefits are spread out – for example, food will be a bit cheaper for everyone, and Third World farmers will see greater profits.

Yet we need to keep a sense of proportion. There are real costs from free trade in terms of workers needing retraining and the provision of unemployment benefits. These outlays will occur mostly over the next decade and will cost $100-$300bn. But the benefits will accrue for at least the next nine decades, and total $500 trillion in present day dollars. For every dollar spent, we will achieve more than $3,000 of benefits.

So if the economic case is clear, why isn’t it implemented? Because the anticipated losses in jobs and wealth are very obvious and concentrated, whereas the gains are thinly spread and less-easily identifiable. The few losers are prepared to support politicians who resist protection cuts, while the gains are sufficiently small per person that they do not act collectively to lobby for reform.

Here you can find all the reports including Kym Anderson, Professor of Economics at the University of Adelaide, main article which has been peer-reviewed in perspective papers by Bernard Hoekman, Robert Schuman Chair and Research Area Director of Global Economics at European University Institute and by Patrick Low, Vice President for Research and Senior Fellow at Fung Global Institute, Hong Kong. Additionally, NGOs and stakeholders such as UNCTAD, International Center for Trade and Sustainable Development, and Australia National University present viewpoint papers concerning Anderson’s analysis.