Friday, June 24, 2011
Why Free Trade Matters
June 23, 2011
Contrary to what skeptics often assert, the case for free trade is robust. It extends not just to overall prosperity (or “aggregate GNP”), but also to distributional outcomes, which makes the free-trade argument morally compelling as well.
The link between trade openness and economic prosperity is strong and suggestive. For example, Arvind Panagariya of Columbia University divided developing countries into two groups: “miracle” countries that had annual per capita GDP growth rates of 3% or higher, and “debacle” countries that had negative or zero growth rates. Panagariya found commensurate corresponding growth rates of trade for both groups in the period 1961-1999.
Of course, it could be argued that GDP growth causes trade growth, rather than vice versa – that is, until one examines the countries in depth. Nor can one argue that trade growth has little to do with trade policy: while lower transport costs have increased trade volumes, so has steady reduction of trade barriers.
More compelling is the dramatic upturn in GDP growth rates in India and China after they turned strongly towards dismantling trade barriers in the late 1980’s and early 1990’s. In both countries, the decision to reverse protectionist policies was not the only reform undertaken, but it was an important component.
In the developed countries, too, trade liberalization, which started earlier in the postwar period, was accompanied by other forms of economic opening (for example, a return to currency convertibility), resulting in rapid GDP growth. Economic expansion was interrupted in the 1970’s and 1980’s, but the cause was the macroeconomic crises triggered by the success of the OPEC cartel and the ensuing deflationary policies pursued by then-Federal Reserve Chairman Paul Volcker.
Posted by Aristides Hatzis at 9:33 AM