The payoff from globalisation

After a steady half-century of trade liberalisation it is fair to ask, what do Americans have to show? As it turns out, quite a lot, says the Institute for International Economics (IIE).

Using four different methods, IIE researchers estimate:

  • The combination of shrinking distances – thanks to container ships, telecommunications and other new technologies – coupled with lower political barriers to international trade and investment generated an increase in U.S. income of roughly $1 trillion annually (measured in 2003 dollars), or about 10 per cent of gross domestic product (GDP).

  • Put another way, after a half-century of shrinking distances and commercial liberalisation, the average American household enjoys an income gain of about $10,000 per year.

    Indeed, each of the four methods calculates that the payoff is very large:

  • The increase in U.S. income sparked by more intense trade with the world equates to 13.2 per cent of GDP.

  • Lower tariffs stimulate U.S. productivity through competitive forces and bring greater product choices to American producers and consumers; the estimate for these benefits comes to 8.6 per cent of GDP.

  • Researchers drew on a computable general equilibrium model to suggest how today's economy would react to the Smoot-Hawley trading environment of the 1930s; that exercise gives an estimated loss of 7.3 per cent of GDP.

  • Finally, researchers calculated the productivity benefits arising from the use of imported components and find a benefit of 9.6 per cent of GDP.

    While none of the four estimates is perfect, the broad result is clear: The benefits of trade and investment liberalisation are positive and large, says IIE.

    Source: Gary Hufbauer and Paul L. E. Grieco, The Payoff from Globalization, Institute for International Economics, May 2005.

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    For more on Benefits of Trade:

    FMF Policy Bulletin/ 07 June 2005
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