Wednesday, June 6, 2012

Free Trade, Full Speed Ahead


It's been a few weeks since I posted on the remarkable shift of the U.S. economy towards openness -- that is, from an economy which was almost exclusively a domestic market for its own goods, to one which participated extensively in global trade.

To put things in perspective, fifty years ago, in 1962, exports and imports were 7.5 percent of GDP. Today, the so-called trade-to-GDP ratio is roughly 0.3 -- that is, 30 percent of American economic activity crosses our national borders. In other words, by this measure, trade has become four times more important to the American economy in the last fifty years.

Readers of this blog know that I'm really interested in and have sought to learn more about the economics of trade and development economics. (For example, see here for a discussion of what the rare-earth metals shortage crisis tells us about trade and rivaling economic systems, here for my attempt at an overview of theories of trade, here for an overview of successful industrial policies in the last century.)

Since then, I've come across a treasure trove of data on tariffs, as well as remarkable news about major free-trade agreements which are in the works and are getting about 1 percent of the press coverage they're worth. (If you've been following me on Twitter, you would have gotten a sneak peak of this post.)

Together, the news and data paint a picture of a world integrating much faster than I imagined -- and about to go full speed ahead towards free trade.

My first piece of evidence is that the average tariff rate negotiated on bilateral "most favored nation" agreements is a third of what it was in 1986 -- roughly 8 percent in 2010, as compared to 26 percent then. "Most favored nation" status literally means that the importing nation cannot offer a lower tariff rate or other preferential treatment to any other exporting nation. The decline in MFN tariff rates implies that trade agreements are more aggressively seeking to dismantle tariffs, quotas, and other barriers. This data comes to us from Francis Ng of the World Bank's research department. The era of the tariff is also most definitely dead in the United States -- it's encouraging to see the microeconomics 101 insights in political application, rather than, say, ignored. In 1996, the average effective percent tariff rate on dutiable imports was 4.7 percent -- hardly burdensome, especially in comparison to the 40 percent levels it remained at for a whole century between 1850 and 1950. The average effective percent tariff rate on all imports was, in 1996, 2.3 percent; compare that to 43.2 percent in 1821. The gap between the red and blue lines, moreover, implies that a shrinking fraction of imports are even dutiable at all. The data comes from the Bureau of the Census here. I find the disappearance of tariffs in the United States, historically, and more recently around the globe to be a remarkable phenomenon. Even more fascinating is the emergence of what by some measures is a bigger trade agreement than NAFTA or the 1957 Treaty of Rome and its successor agreements which integrated economically the European Union: the Trans-Pacific Strategic Economic Partnership. It's amazing how few people have heard about this -- it may very well be biggest news you haven't heard about -- the trade agreement, if completed, would dramatically reduce barriers to trade in the United States, Japan, Peru, and a host of other Pacific rim and East Asian nations. Here's an excellent introduction from The Economist; another from Bloomberg Businessweek.

And with the biggest free trade deal in history currently in negotiations right in front of its doorstep, China is getting nervous. It was already working on a trilateral China-Japan-South Korea free trade agreement, ambitious in itself -- now it is calling for the Doha talks to be sped up such that they are "completed by this summer," Xinhua, the Chinese government news outlet, reported today.

There appears to be a virtuous feedback loop with free trade agreements. Rolling back barriers to trade incentivizes investment, some of which is diverted from uncooperative nations, which leads everyone to cut tariffs when that is the expected behavior from rival nations in the "game."

One way or another, the world seems poised for this year or the very near future to bring a major acceleration of trade liberalization initiatives. Here comes a world of trade.

Photo courtesy of Aale Boek.

3 comments:

  1. Hello Evan, I hope this comment reaches you as google is messing me about. Here in Australia (which is also part of the TPP negotiations) we are very concerned about the imposition of US intellectual property rules, and the 'Investor Dispute' provisions that may allow tobacco companies to challenge local anti smoking measures. Do you have any views about these would fit into the virtuous feedback loop? http://theconversation.edu.au/australia-should-defend-neighbours-in-trans-pacific-partnership-negotiations-5902

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  2. When I studied trade theory in grad school, we started out with all the standard models, and literature about how damaging tariffs are, etc, and people would get fired up about how bad trade barriers were. But when I actually dove into the empirical evidence, I was shocked at how low the average tariff rates really were. It's a battle that free traders, by and large, have won. Even in the developing world, people are looking at the profound benefits of trade liberalization in India and China and are deciding to lower barriers. I completely agree with you that this is an under talked-about phenomenon, especially when you consider just how much life has improved for the poor.

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  3. Evan,

    I think the real question is how much back-door protectionism that's happening through antidumping laws.

    Greg Mankiw had a great piece about this in Foreign Affairs.

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