Trade Compliance

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A Fresh Look at America’s Economic Payoff from Globalization

Posted May 09, 2017

Updating a study originally made in 2005, a new policy brief by researchers at the free-trade oriented Peterson Institute for International Economics (PIIE), calculates that economic benefits to the United States from trade expansion totaled more than $2.1 trillion between the years of 1950 and 2016. Measured in 2016 dollars, that translates to a rise in gross domestic product per capita and per household at $7,014 and $18,131, respectively.

According to the report, what it terms the beneficial “payoff” attributable to global trade expansion derives from a combination of policy liberalization together with improvements in transportation and communications technology that have been made over the past 65 years.

“Clearly, increased trade since WWII has generated significant gains to the United States,” write Gary Hufbauer and Zhiyao Lu, the study’s authors. “But liberalization still has a long way to go; the potential gains from future policy liberalization could be as large as roughly $540 billion for the United States by the year 2025.”

In this regard, the report notes that although average world tariffs on manufactured products are relatively low, at 5.6% in 2015, they are still significant; and while average U.S. tariff rate of 3% on such goods is lower than the global average, it is still almost 1% higher than the median applied by countries in the Organization for Economic Co-operation and Development. Moreover, it points out that tariffs in developing countries, such as China, remain high and have barely changed at all in recent years.

An even greater barrier than tariffs to trade in manufactured goods and other merchandise, the report states, is now posed by logistics costs, which includes factors such as corrupt and inefficient customs bureaucracies, inadequate ports and airports, and poor intermodal connections between ships, airports, railroads, and highways. While the World Trade Organization’s landmark Trade Facilitation Agreement that was finally ratified earlier this year has the potential to decrease logistics costs significantly, it requires effective implementation on a country-by-country basis for it to achieve these benefits.

Although economists at PIIE are known for being favorably disposed towards global trade liberalization – White House advisor Peter Navarro once scathingly dismissed them as “pimps of globalization” – the report’s authors admit that “expanded trade results in losers as well as winners” and observe that “losers are seldom compensated.” Echoing sentiments expressed in a recent paper jointly produced by the WTO, World Bank and the International Monetary Fund defending the global trading system, the report says that governments need to do more to address the needs of displaced workers including the implementation of improved adjustment assistance programs.

Calculations in the report suggest that 156,250 U.S. manufacturing sector jobs were lost annually over the past 13 years, representing less than 1% of the number of people “involuntary separated” from their jobs each year.  The gross private costs of adversely affected workers from 2003 to 2015 are estimated to average between $28 billion and $40 billion per year, which the report states is much smaller than gains from expanded trade during the same period.

A more generous unemployment insurance program and expanded tax credits would help displaced workers adjust, the authors argue, while preserving the large gains resulting from trade expansion and alleviating some of the political hostility to globalization.