AROUND the world, people are waking up to the benefits of freer trade. After years of free trade fatigue and growing protectionism, a majority of Americans now say the United States should pursue global free trade, while the European Union is striking free trade deals as fast as it can. Even regional geopolitical rivals China, South Korea and Japan have agreed to greater cooperation.
The threat of a global tariff war has driven many to the conclusion that everyone is better off when countries specialise in what they’re best at. This rosy view is a stark contrast to the vision of trade as a zero-sum game that other countries have won. And yet, the downsides of free trade are real: Images of the “Rust Belt” of America have come to stand for the negative impacts of free trade not only with US voters but also globally. Miles of once-mighty factories were silenced and once-proud communities devastated when corporations shifted their manufacturing offshore.
Both things can be true. The benefits and costs of free trade policies don’t fall equally. Wealthy countries benefit relatively less from freer trade, and parts of their workforce carry a disproportionate burden. But despite this, peer-reviewed research by Copenhagen Consensus economists shows that freer trade is still overwhelmingly good even for rich countries.
Real and substantial costs
The researchers’ economic model investigates what happens if we grow global trade by 5 per cent. There are real and substantial costs. Across the entire world, for all workers and into the future, the present-day cost would be almost one trillion dollars. That comes from adding up the impacts to the wage packets of affected workers who lose their jobs, or have to downsize to lower-paid roles, or end up abandoning the workforce altogether.
Some 92 per cent of that cost occurs in developed countries. After all, this is where most of the import-exposed markets are. It is where wages are the highest and where workers are most at-risk from cheaper or better products from poor countries entering rich countries. These losses are real – a trillion dollars is a vast sum to anyone.
But we also need to remember the substantial benefits of free trade. Indeed, the same shift that saw factories leave former industrial centres also drove incredible economies of scale and allowed consumers everywhere to buy cheap and often fairly well-made products from huge box-stores.
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Middle-class Americans gain an estimated 29 per cent of their purchasing power from foreign trade. In other words, the average middle-class American can buy nearly one-third more for each dollar than if there was no trade. The effect is even bigger – 62 per cent – for the poorest tenth of American consumers.
When we count the benefits of free trade in the rich OECD countries, these are much higher than the costs: US$6.7 trillion. In total, this means a US$7 return for each dollar of costs. Yes, governments should work harder to help the workers who would be most hurt by freer trade, but even after addressing the nearly one trillion in costs, there are over US$6 trillion in benefits to be enjoyed across the rich world. Any government would be foolish to ignore these much larger benefits, despite their substantial costs.
Perhaps even more importantly, the research shows that free trade is hugely beneficial for poorer countries. This is why it is a tragedy that politicians have abandoned the multilateral free trade agenda altogether: Freer trade can generate huge gains for the world’s poorest countries. When the world’s poorest countries are better off, the whole world is a stronger, more stable place.
Win-win for rich and poor
The world’s low and lower-middle income countries that are home to four billion people will suffer some costs from freer trade, but these are relatively low at US$15 billion. Yet, their gains from freer trade would be a fantastic US$1.4 trillion in benefits. Because the poorer world’s economies are much smaller, this is a much bigger deal. And because their costs are much lower, each dollar in cost delivers US$95 in benefits. That’s an astonishing return on investment.
In a world grappling with inequality and economic uncertainty, freer trade remains one of the most powerful tools for shared global prosperity. While its costs – particularly in developed countries – are real and must be addressed with smarter, fairer policies, the benefits are too significant to ignore. With nearly US$7 in returns for every US$1 in cost for rich nations, and an extraordinary US$95 return for poorer countries, freer trade is a win-win. The path forward is not protectionism, but reform to make sure the gains of trade are not only greater, but are also better shared.
Bjorn Lomborg is president of the Copenhagen Consensus, visiting fellow at Stanford University’s Hoover Institution, and author of Best Things First
