A new study by a Brigham Young University economist found that removing trade barriers in four key nations would inject about $50 billion into the United States' economy annually while increasing income in developing nations by $150 billion a year.
"That is more than all the foreign aid that we give to them every year," said Scott Bradford, BYU assistant professor of economics, who reports his findings in the new issue of "The Review of Economics and Statistics," published by MIT. "The research fleshes out the idea that 'trade more than aid' is what these developing countries need. Efforts to work on multilateral trade openings are going to be worth it in terms of increasing wealth for the whole world."
Bradford explains that all countries impose barriers to international trade. Some are obvious, like tariffs on imported goods. Others are more opaque, like burdensome customs procedures or labeling requirements. The barriers, usually levied to protect domestic producers from competitors abroad, end up creating such inefficiencies in markets that the costs to the country's consumers outweigh the benefits to the protected producers.
He identified the costs of barriers by analyzing detailed price comparisons among various countries, then plugged those costs into a computer model of the world economy. This allowed the model to simulate trade without barriers imposed by the U.S., Japan, Canada, and Australia -- the four nations for which detailed enough data were available.
In addition to the benefits to the economies of the U.S. and developing countries, the model showed a yearly increase of $100 billion to Japan's economy, which employs the most trade barriers among the nations studied and has been economically stagnant for more than a decade. Bradford's more recent research, not yet published, shows similar results when including western European nations in the model.
"What Scott has done is develop a measure of barriers to trade that go further than the traditional methods," said Robert Lawrence, professor of international trade and investment at Harvard, where Bradford earned his Ph.D, and a member of the President's Council of Economic Advisers from 1998 to 2000. "Using a sophisticated model leads him to come up with much larger numbers of the benefits from international trade than others have traditionally obtained. It represents an advance on what previous work has done."
Extra costs arise when restrictions or taxes are placed on imported goods. This artificially raises prices for consumers because it allows domestic producers to charge more, since they are not facing international competition.
"The price of sugar in the United States is 40 to 50 percent higher than it would be without these trade barriers," Bradford said. "We're preserving the jobs of sugar manufacturers in the U.S., but higher prices for consumers impose large costs on the economy."
Bradford's study only covers protection in final household goods and capital goods and does not include goods that are inputs into other industries, such as steel and unprocessed wheat. The projected gains to nations' economies would be higher if the analysis included such goods, he says.
He notes that income gained by removing trade barriers would be more than enough to fund a generous wage subsidy program to help American workers who would lose jobs or must take lower paying jobs in the event of loosening trade.
"We need to keep working on liberalizing trade," Bradford said. "We do need to be attentive to those who get hurt by free trade, but this research indicates we can help them and still come out well ahead, and at the same time help people in developing countries quite a bit."