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Two New Studies on Economics of Trade

Our friends at the Property Rights Alliance and the Mercatus Center have just released two new papers that are well worth reading.

First, Philip Thompson and Lorenzo Montanari have compiled a Trade Barrier Index, just released by the Property Rights Alliance. The U.S. currently ranks 54th out of 86 countries. Singapore and Hong Kong rank 1st and 2nd, while India and China bring up the rear at 85th and 86th, respectively. Among our neighbors, Canada weighs in at 10th, while Mexico is 58th. Their index takes into account four policy areas: tariffs, non-tariff barriers, barriers to services, and trade facilitation, such as participating in international trade agreements and the World Trade Organization.

It is highly useful to have a ranking system for making international comparisons. Even with all the tariff hikes of the last two years, it was still surprising and disappointing to see the U.S. ranked as low as 54th. Hopefully future editions of the Trade Barriers Index can add historical data to give greater context, such as how far the United States has fallen in the last two years, and how much the world as a whole has liberalized trade barriers since the end of World War II.

Protectionists are often quick to point to fast-growing China and India’s protectionism as proof that trade barriers can help growth. But liberalization at the margin can have a huge positive impact on growth; going from terrible policies to merely bad ones still counts as improvement, and can still lift people out of poverty. Further liberalization would help even more. China and India have liberalized, imperfectly, along many non-trade policy dimensions post-1978 and post-1991, as Arvind Panagariya points out in great detail in his excellent book Free Trade and Prosperity: How Openness Helps Developing Countries Grow Richer and Combat Poverty. Thompson and Montanari’s Trade Barrier Index allows us to see how countries fare on trade policy compared to other policy areas such as property rights, regulation, and corruption measured by other indices.

Second, the Mercatus Center’s Veronique de Rugy has a much-needed new policy brief, “New Protectionism: Still Protectionism and Bad Economics,” which punctures some common myths about trade. These include:

  • The 19th-century United States grew despite high tariffs, not because of them. Territorial growth and open immigration grew the domestic market for U.S. goods faster than protectionism could shrink their international markets.
  • The East Asian tiger economies didn’t grow because of tariffs or industrial policy. On net, post-war South Korea, Singapore, Hong Kong, and Taiwan were vastly more liberal than before, even accounting for their varying levels of tariffs, export subsidies, and other interventions. It was this net liberalization that paid dividends. As Panagariya points out, growth accelerated once export promotion policies were lessened.
  • U.S. manufacturing output is at near-record levels. At the same time, manufacturing employment is down, and this is a good thing. The goal of manufacturing is not to create jobs, it is to create things that people value. In an ideal world, all that value would be created without anyone having to lift a finger. This will obviously never happen, but when record output comes from ever fewer workers, it’s a step in that direction. The workers whose time and talent are being freed for other, additional uses make the rest of the economy more productive, too. The adjustment is not always painless, but many government policies intended to help can worsen the problem. Legislators should heed Veronique’s advice and tread lightly here.
  • The middle class is indeed shrinking—because people are moving into the upper classes. The proportion of people making between $35,000 and $100,000 per year, inflation-adjusted, has been shrinking for years. This isn’t because incomes are going down. It’s because they’re going up. Declining global trade barriers over the last 75 years are a significant reason why.
  • Subsidies do not make trade fair. China subsidizes many of its exports. This is good for American consumers, but bad for the Chinese people, who are paying to further enrich people who are mostly richer than themselves. A similar dynamic applies in the United States. In order to subsidize or protect one American industry, Washington must penalize American consumers and other American industries, all in order to give foreign buyers a price break. Contra Peter Navarro, trade cannot be fair unless it is free.

Trade protectionists have called on a wide variety of arguments to justify raising barriers, from growth to nostalgia to inequality to fairness. As Veronique points out, none of them hold up to scrutiny.

Philip Thompson and Lorenzo Montanari’s Trade Barrier Index is here. Veronique de Rugy’s “New Protectionism: Still Protectionism and Bad Economics” is here.