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May 07, 2007

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jon

First you say

"...I would not quarrel with the assertion that globalization increases the size of the pie for the U.S.,..."

Then you appear to support an estimate of

"...increase U.S. income by 0.1% by 2015..."

which is nothing more than a rounding error, in my opinion.

Do you believe that globalization increases the size of the pie or do you think that international trade effectively amounts to a zero sum game?

jon

Oh, and an interesting note is that while

(exp(1.17)-1) ~=222%

a simple misreading could result in

exp(1.17 - 1) ~=118%

dissent

Wow. I'm not an economist, I just read the blogs. I had no idea the case for free trade is so flimsy. And for this we are losing our shirts? A scandal!

gallagher

Rodrik is indeed right regarding the estimates of the gains from trade that come from the most established CGE models. What's more, these models also estimate that the Doha Round will do very little to alleviate poverty around the world. For a user's guide to these models and the estimated impacts of the Doha Round see:
http://www.ase.tufts.edu/gdae/Pubs/rp/PB07-02WTOPovertyApr07.pdf

Dean Baker

very nice piece, you saved me the trouble of having to read through this tripe.

Pancho Villa

In your paper you said that "an increase in the tariff has the effect of allocating more of the economy's labor to the manufacturing sector; dn/dτ > 0"

This would then normally also imply "higher" inflation in the agricultural sector...

notsneaky

Isn't the flip side of the "trade doesn't increase GDP that much" argument that
"trade doesn't have that much of the effect on the distribution of income"?

unlawflcombatnt

Thanks for posting this and the posting the link to the study. As you've stated, it appears that the potential gain to U.S. income from full trade liberalization by 2015 is only 0.1%. This number is shown in at least 3 of the tables- Table 2, Table 6, and Table A5. From Table 2, the real income gain for the United States by 2015 would be only $16.2 billion. (For comparison, the annual budget for the state of California is $100 billion.) The "alternate" scenarios show an even smaller U.S. income gain, ranging from only 0.01% to 0.05%. Worldwide, the total estimated income gain from total liberalization of trade was only +0.7%.

Table A-7 shows that U.S. (non-food) merchandise exports would DECLINE by $10 billion by 2015 with full global trade liberalization. (Just what our declining manufacturing sector needs-an agreement that will cause further declines).

As best as I can tell from the charts, U.S. tariffs are lower than any other country in the world (Though I'm not completely sure I read the charts correctly on this.)

The authors' conclusion reads "In conclusion, the July Framework Agreement does not guarantee major gains from the Doha Development Agenda. On the one hand, even if an agreement is ultimately reached, it may be very modest...."

"Modest" indeed. For the United States, the benefit is essentially 0.

The microscopic alleged "benefits" to full trade liberalization certainly don't seem worth the massive increase in income inequality they'll cause. And this is assuming that there's actually any benefit at all.

Adam

Dani,

If you think that's bad, you should see Hufbauer's pre-NAFTA NAFTA-related employment forecasts. Talk about making up numbers: http://bookstore.petersoninstitute.org/book-store/70.html

Dani Rodrik

Adam --

You are indeed right. I had referred to the study you mention in earlier post. See my post on "Can the Wrong Answer in the Classroom be the Right Answer in Public Debate?"

notsneaky

"The microscopic alleged "benefits" to full trade liberalization certainly don't seem worth the massive increase in income inequality they'll cause."

Will they? This is pretty much wrong. If the benefits of full trade liberalization are microscopic then the inequality effects are microscopic as well.

If .5[t/(1+t)]^2*m*e are the benefits of trade then the change in producer surplus (roughly the loss to the loosers of trade liberalization) is going to be pretty similar, except that it depends on the elasticity of supply rather demand. Essentially, in order to argue that trade has profound distributional effects for an economy like US, you have to argue that the supply elasticity is very very large, much larger than the e=3 elasticity of demand Dani uses above.

There's very little of a way out in escaping the conflict here. Either free trade has large aggregate benefits and significant impact on distribution/inequality, or it doesn't much affect either. For a large, diverse, mature, developed economy like US I'd argue the latter is the case.

If we're going to present the case for free trade honestly - noting all the caveats and being up front about the magnitude of the gains - then the same thing should be done for its impact on distribution.

Ben

Thanks for an interesting post. I think I can see where the 118 percent cited by Bradford et al came from.

Rose estimated three benchmark models, with three associated regional FTA coefficients: 1.17, 0.78, and 0.91 (Table 1).

Bradford et al used the smallest of these - 0.78. Their calculation is 100*(exp(0.78)-1) = 118 percent (in footnote 60)

Bradford et al actually reduce the 118 percent by 25% to to 89 percent to account for trade diversion (page .

DRR

One of the authors have of course, already responded to your critique, but my larger point is towards the autarkists in in the thread poo-pooing the supposed minimal benefits of America fully liberalizing trade.

Doing this of course while failing to understand that, even given such low estimates for argument's sake, the reason why the proposed gains from further liberalization are so small is because America is already a very open economy with extremely low trade barriers that, as Prof. Rodrik has previously demonstrated, has already reaped most of the benefits to be realized from trade liberalization.

Put more succinctly, the more & more you liberalize your markets, the less & less benefit you reap from further liberalization as you have less far to go. The benefits the U.S. would derive from reducing an average tariff rate of 5% (already the lowest in the world) to 0%, is not going to be that large.

Comparatively, the benefits reaped from past liberalizations over the last 60+ years, In which the average tariff rate was unilaterally reduced from nearly 35% to under 5%, the same time period in which all GATT countries collectively reduced their tariffs an average of 17% per negotiating round (8 different rounds) experienced the same affect. The largest gains from liberalization occured roighly between Eisenhowers 2nd term & Carter's first.

Of course, this is obvious to any economist but worth reiterating for the benefit of autarkists arguing in bad-faith.

Dani Rodrik

notsneaky says:

"'The microscopic alleged "benefits" to full trade liberalization certainly don't seem worth the massive increase in income inequality they'll cause.'

Will they? This is pretty much wrong. If the benefits of full trade liberalization are microscopic then the inequality effects are microscopic as well.

If .5[t/(1+t)]^2*m*e are the benefits of trade then the change in producer surplus (roughly the loss to the loosers of trade liberalization) is going to be pretty similar, except that it depends on the elasticity of supply rather demand. Essentially, in order to argue that trade has profound distributional effects for an economy like US, you have to argue that the supply elasticity is very very large, much larger than the e=3 elasticity of demand Dani uses above.

There's very little of a way out in escaping the conflict here. Either free trade has large aggregate benefits and significant impact on distribution/inequality, or it doesn't much affect either. For a large, diverse, mature, developed economy like US I'd argue the latter is the case."

Not so fast notsneaky! Actually, the distributional effects can be quite large even though net gains are small. Lets consider a small change in the tariff, t. Then change in producer surplus is Q(dp/dt), while net gain is t(dM/dt) = t(dM/dp)(dp/dt). You can easily check that the first can be arbitrarily large relative to the second by making initial level of t sufficiently small.

rifek

Perhaps I'm just thick. No, I AM just thick. Nevertheless, I think notsneaky's post is an example of why reality is reality, models are models, and one should not be confused for the other, because with reality you get what you get, while with models you get what you select for.

The SPE formula selects for certain trade elements but ignores other, very real factors that any policy maker should pay attention to, such as workforce dislocation, exporting of jobs, costs of resulting losses in social infrastructure, etc. Consequently, even if the $12,000 figure were correct, it tells us nothing about the actual distribution of the increase; the distribution could be so uneven as to create a socially and politically disastrous concentration of wealth.

Basing comprehensive policy on such an incomplete model is akin to the man who drowns wading across the river because its average depth is four feet.

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Sandro Perricelli

Dani,
The estimates of gains from trade based on CGE models have several drawbacks. To begin with, they do not consider the possibility of X inefficiency. There is plenty of evidence that upon liberalization there are significant gains in productivity. Then there are all the Parente-Prescott stories about monopoly power. We do not have to believe with a straight face on everything Prescott claims, yet there is something on their story about the effects of monopolies.

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