Monday, June 06, 2005

Free trade windfall

Two economists calculate the benefit of trade liberalization in “The Payoff from Globalization”:

Since World War II the United States has led the international quest to liberalize world trade and investment. With leadership from the White House, Congress has slashed the simple average tariff rate from 40 percent in 1946 to 4 percent today, and other industrial nations have done much the same. After a half-century of steady liberalization it is fair to ask, what do Americans have to show?

As it turns out, quite a lot. Using four different methods, we estimate that the combination of shrinking distances -- thanks to container ships, telecommunications and other new technologies -- and lower political barriers to international trade and investment have generated an increase in U.S. income of roughly $1 trillion a year (measured in 2003 dollars), or about 10 percent of gross domestic product. This translates to a gain in annual income of about $10,000 per household.
One of my favorite anecdotes on laissez-faire economics is about John Cowperthwaite, a British officer sent to oversee the post-World War II economy in Hong Kong. As P.J. O’Rourke detailed, Cowperthwaite’s strategy was to do…nothing. In fact, he took steps to avoid any government interference of Hong Kong’s economy which eventually grew to be one of the richest on earth.

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