Free Trade: Spurring Two Centuries of Innovative Protectionist Arguments

The Oregonian’s OregonLive post, “Case for free trade confirmed by new research” (March 30, 2016) reviews recent debates among politicians, pundits, and economists over the benefits of internationals trade and new trade agreements (and the potential damage that protectionism and trade wars could cause). New research is discussed and the article’s author reports:

For the U.S. as a whole, Chinese imports meant lower prices and higher real incomes. But, consistent with the prolonged albeit local dislocation, America’s short-run net gains from greater trade with China are estimated to have been small — still positive, please note, but not much above zero. In the long term, the gains comfortably outweigh the costs. According to another study cited by Autor, the rise in trade with China yields an increase in long-term U.S. welfare of more than 6 percent.

It is true that international trade doesn’t benefit everyone evenly. Consumers benefit from lower prices for goods and services. Many producers benefit as well from lower cost goods, and from exports to new consumers around the world. But other producers, along with their employees and stockholders, are hurt as they struggle to compete with lower-priced goods imported from other countries.

(For the nuts and bolts of trade policy gains and costs, see Doug Irwin’s July/August, 2016 Foreign Policy article, “The Truth About Trade.”)

Clive Crook, the OregonLive author, notes the gains achieved toward international “equality of income”:

Incidentally, it’s worth noting that the gains China reaped from trade have been vastly greater than the gains derived by the U.S. Hundreds of millions of Chinese have been lifted out of poverty, supporting one of the greatest surges in economic and social progress the world has ever seen. If distribution matters — a point that’s often emphasized by progressive free-trade skeptics — the enormous relief of poverty outside the U.S. should presumably count for something.

One could quibble with the claim about benefits to China being “vastly greater than the gains derived by the U.S.”  First off, China is a big expanse of dirt and rock, just like the U.S.: It is people that count and when people in the U.S. exchange goods and services with people in China, there is no clear way to compare the subjective value of gains from trade.

That hundreds of millions of people in China can now eat meat more than once a month, millions fewer live in caves and have enough clothes for the whole family; these are measures of moving out of abject poverty.

International investment and trade have increased incomes and reduced poverty around the world, not just in China. A 2015 World Bank study raises the measure of extreme poverty from income below $1.25 per day to $1.90 per day, and “forecasts that the proportion of the world’s population in this category will fall from 12.8% in 2012 to 9.6%.

As world population expanded from 5.3 billion in 1990 to 7.2 billion in 2015, those living in extreme poverty dropped from 1.96 billion (37% of world population) to 702 million (9.6% of world population). Obviously, that’s still 702 million too many, but had market reforms not expanded productivity and prosperity since 1990, we might expect the same 37% of world population in poverty, or 2.66 billion instead of today’s 702 million.

So, by some magic, nearly two billion people have lifted themselves out of extreme poverty. That magic has been conjured mostly by market reforms in China, India, and Indonesia, the world’s most populated underdeveloped countries in 1990. Government reforms opened the doors for foreign direct investment allowing tens of thousands of factories and firms to be launched and by local and foreign investors, creating hundreds of millions of light manufacturing and service sector jobs.

HumanProgress.org reports on the decline in poverty worldwide, and notes that China stands at the center of this success story:

Ending extreme poverty may sound like a remote dream voiced by idealists and beauty pageant contestants, but that goal’s attainment is actually closer than you think. The share of people living in absolute poverty (i.e., living on less than $1 a day) has dwindled to around five percent of the world’s population. Much of this progress can be attributed to massive poverty reduction in China that elevated hundreds of millions of people out of destitution.

The HumanProgress.org article further reports on poverty’s decline:

Not only has the share of the global population living on less than $1 a day fallen, but so has the total number of people living on less than $1 a day. This is incredible when one takes into account population growth.  Consider the graph below, showing the total number of absolute poor decrease by more than 700 million between 1981 and 2008, even as the world population rose by 48 percent (i.e., over 2 billion). Again, a large part of this improvement can be explained by China. Even if one excludes China, close to 200 million people escaped absolute poverty over this time period.

HumanProgress.org authors focus on improving economic freedom around the world, from the market reforms in China beginning in the early 1980s, to the fall of communism in the late 1980s, to India’s economic reforms after their 1991 financial crisis.

However, the October, 2015 BBC article on the World Bank report claims:

The World Bank says the downward trend is due to strong growth rates in developing countries and investments in education, health, and social safety nets.

I would argue “investments in education, health, and social safety nets” played little or no role in the stunning economic expansion that enabled billions to escape poverty over the last 25 years. For speech and debate students researching U.S./China policy reforms, sorting out these claims will be a challenge and an opportunity to learn and to help others appreciate the vast gains from exchange and investment between people and firms in the world’s two largest economies.