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More trade should be at top of the global agenda

Apr 06,2023 - Last updated at Apr 06,2023

Supporting free trade is out of fashion. In rich countries, it has been blamed for job losses and all-but-abandoned by policymakers. Over the past century, trade had been increasing as a percentage of the entire global economy, but this peaked around the Global Financial Crisis, and is now declining. This is true for Jordan as well, where the share of trade in the economy has dropped significantly over the past 15 years. This is regrettable because ensuring freer trade turns out to be one of the world’s best development policies.

It has been known for centuries that trade lifts incomes because it allows a nation to specialise and produce effectively what it does best. One study finds that trade makes us all 27 per cent richer, meaning that countries on average have incomes more than one-fourth higher compared to a world without trade.

Trade does not just lift average incomes. It also helps lift the world’s poor out of abject poverty. One of the most cited recent studies finds that the incomes of the poorest 20 per cent grow as fast as the average.

We have seen this clearly in the world’s two most populous nations, China and India. As China’s trade soared, incomes rose seven-fold and extreme poverty declined from 28 per cent to near-zero today. India has experienced a similar, if more muted trajectory: When tariffs were reduced from a stifling 56 per cent in 1990 to 6 per cent in 2020, average incomes rose almost four-fold and extreme poverty declined from 22 per cent to 1.8 per cent. We have seen similar trajectories for other fast-growing countries like South Korea, Chile, and Vietnam. Prosperity from trade really is shared.

It is little wonder then that achieving freer trade is one of the promises that world leaders have signed up for with the so-called Sustainable Development Goals for 2030. Unfortunately, the world is failing on this promise and on most other promises.

It is no secret why. Leaders promised everything to everyone, and the list of promises runs to 169 targets. Having 169 priorities is like having none at all. The list has plenty of core targets such as increased trade, the eradication of infant mortality, better schooling and the elimination of war and climate change. But simultaneously it includes well-intentioned but much more peripheral targets like boosting recycling, more urban parks, and promotion of lifestyles in harmony with nature.

This year the world is at halftime for the Sustainable Development Goals, but we are nowhere near halfway. It is clear the world cannot do everything, so it is time to identify and prioritise the most crucial promises. My think tank, the Copenhagen Consensus, is doing exactly that: Together with several Nobel laureates and more than a hundred leading economists, we have been working for years to identify where additional money can do the most good.

New, peer-reviewed research shows why more trade should be at top of the global agenda. The research takes into account the problems of job losses highlighted by rich-world politicians. It maps out how much additional cost freer trade imposes on these workers through losing their jobs, needing to reskill (often to lower-paying jobs), or leaving the job market altogether.

But the study also uncovers the advantages of more trade such as higher incomes and the consequent improvements for the world’s poor. This makes it possible for us to weigh both the costs and benefits of freer trade. The study isground-breaking, because it offers the first attempt ever to establish costs and benefits not just at the global level, but for the world’s rich and poor.

The economic model shows that if we grow global trade by 5 per cent, the present-day cost for all workers across the entire world into the future would be one trillion dollars. This cost certainly justifies the concern of populist politicians. Yet, the benefits to mankind turn out to be $11 trillion, making this a very good deal for the world.

The people who are hurt by free trade should be helped more by governments around the world, but the significant surplus from freer trade not only provides a pot of money to do so, but also presents an enormous development opportunity to raise incomes and lift people out of poverty.

The new model also shows who bears the costs, and demonstrates why rich countries have cooled most on trade. Because rich countries make up the larger part of the global economy, they gain 60 per cent of the $11 trillion. But they suffer more than 90 per cent of the costs. While this validates some political concerns, it misses the larger picture: Rich countries gain $7 for every dollar of costs.

And it entirely neglects what a great opportunity trade is for the poorer half of the world. Their costs are quite minimal at $15 billion, but benefits run far beyond a trillion dollars. For each dollar of loss, the economists find a phenomenal $95 of long-term benefits, increasing incomes and driving down poverty.

If we are serious about improving the world, we cannot promise everything. We have to do the most efficient policies first, and more trade turns out to be one of the most amazing ways to deliver better lives and incomes. 

 

Bjorn Lomborg is president of the Copenhagen Consensus and visiting fellow at Stanford University's Hoover Institution

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