Lowering Tariffs Is Good. Period, Full Stop.

I noticed two interesting articles touching on international trade today. The first is Arvind Panagariya’s Foreign Policy article coming out this month. He busts a bunch of myths and urban legends about the effects of trade and trade barriers (as well as providing evidence that supports truths):

“Rich Countries Are More Protectionist Than Poor Ones”

Not even close. On average, poor countries have higher tariff barriers than high-income countries. …

“Freer Trade Increases Poverty in the Third World”

Not true. Historically, countries that have achieved large reductions in poverty are generally those that have experienced rapid economic growth spurred in significant measure by openness to international trade.

My Western Economic History students are learning that one this quarter, through the complementarity of open trade in goods and knowledge with technological change.

“Agricultural Protectionism in Rich Nations Worsens Global Poverty”

Not necessarily. If developed countries eliminate all forms of agricultural protection, including subsidies to domestic producers and quotas on foreign imports, their agricultural production will decline and the worldwide price of agricultural products will increase. Therefore, poor countries that are efficient agricultural producers will benefit from higher prices and access to new export markets. But consider the flip side: Poor countries that import agricultural products will suffer from higher prices. In 1999, as many as 45 of the 49 least developed countries imported more food than they exported. In 2001, for example, Senegal spent as much as $450 million on food imports, equivalent to about 10 percent of its gross domestic product and one third of its annual export earnings. Certainly, if agricultural trade is liberalized and prices rise, some poor countries will become net agricultural exporters, but many will not.

Obviously this is the interesting point given what just happened in Cancun. So the truth is more like “agricultural protectionism in rich nations worsens poverty in poor countries that import agricultural products”.

“Poor Countries Should Not Open Their Markets If Rich Countries Maintain High Trade Barriers”

Big mistake. As the late British economist Joan Robinson once remarked, “if your trading partner throws rocks into his harbor, that is no reason to throw rocks into your own.”

Plus ya gotta love someone who quotes Joan Robinson, especially this vivid quote.

Now, skipping to the one nearest and dearest to my heart:

“Free Trade Is Bad For the Environment”

No. Certainly, trade forces can hurt the global environment. For instance, the rapid expansion of coastal shrimp farming in several countries in Asia and Latin America in the 1980s, driven principally by the demand for exports, led to the contamination of water supplies and destruction of surrounding mangrove forests. But trade opening can bring environmental benefits as well. For example, the agricultural liberalization proposed in the WTO’s Doha negotiations would not only bring economic and efficiency benefits by shifting production from high-cost to low-cost producers, but it would also yield environmental benefits by replacing Europe’s pesticide-intensive agriculture with natural manure-intensive agriculture in developing countries.

Activists who decry the environmental impact of trade should realize that trade protectionism often brings environmental costs as well. During the 1980s, the United States imposed quotas on Japanese small-car imports; the policy not only hurt U.S. consumers but also harmed the environment by reducing access to lower-pollution vehicles. More broadly, closed-door policies in pre-1989 Eastern Europe were accompanied by an extremely poor environmental record.

One thing that free trade does is increase the returns to defining and enforcing property rights; protectionism creates incentives to do things like mow down all of the forests in Indonesia (OK, a little hyperbolic, but you get the point). Property rights align long-run yield and profit incentives with environmental sustainability in many ways.

The second article was James Pinkerton’s Tech Central Station article today on a Cato Institute forum he attended recently that addressed the post-Cancun foreign trade environment. After he summarizes the comments of the panelists he offers this relevant comparison from an earlier TCS article of his:

Leadership that transforms is always risky; in the history of trade policy, bold leaders have sometimes transformed themselves out of a job, even as they have etched themselves into the pantheon of world-improvers. So I empathize with Padilla’s worries, and certainly don’t envy his daily drudge. As I noted last month in TCS, the government of Britain’s Robert Peel fell after the Tory prime minister unilaterally eliminated the Corn Laws in 1846. So Peel was out of a job, but more British workers were eating well. And yet his vision was vindicated just two years later, in 1848, when radical revolution swept through Europe; amidst all the proto-Marxist convulsing, British workers were not motivated to storm the barricades.

Leadership that transcends short-run political issues is certainly required in dealing with trade.

Along similar lines, I also recommend Don Boudreaux’s and Dwight Lee’s TCS article today on trade restrictions, with reference to the steel tariffs.