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We are missing the forest for the trees on free trade

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As the U.S. and China are locked in a major trade dispute, the White House is renegotiating existing free-trade agreements to turn them into “managed trade” agreements, and the mood has turned against freer trade around the world. 

Yet, at the World Economic Forum in Davos, the Japanese Prime Minister Shinzo Abe and Germany’s Chancellor Angela Merkel both made calls for more free trade and multilateralism.

{mosads}One region that stands against the trend of rising nationalism and protectionism is Africa, which is slowly working toward creating the world’s largest free-trade area, uniting 54 nations with a combined population of more than 1 billion people and a combined gross domestic product of more than $3.4 trillion.

This should come as little surprise because if there is a single policy that could help boost the world’s poorest economies (many of which are in Africa), it is free trade.

The tragedy is that genuine, global free trade would have benefits that reach far beyond that continent worth trillions of dollars. By turning against free trade, we are denying the world’s poorest genuine opportunities to climb out of poverty, while cutting off great benefits for the rest of the world.

Freer trade always comes with costs. In every trade deal, some people lose their jobs, and some of these will struggle to find other work. These human costs are often concentrated in specific places.

In the U.S., for example, we find the Midwest and parts of the South worst hit because they relied on manufacturing, which is costlier and less efficient than it is overseas.

It is very clear from the backlash in the U.S. — but also in parts of Europe and elsewhere — that in many places, those costs and effects have not been planned for, acknowledged or ameliorated enough by the architects of freer trade deals.

These costs of trade make powerful stories: a shuttered factory; blue-collar workers being laid off; proud people finding themselves living in cities that no longer have an industrial heart.

But when we focus in on these stories, we are missing the forest for the trees.

One study suggests free trade increases income inequality and that the cost of redistribution could erode upward of 20 percent of the overall benefits that come from a free trade deal.

That’s significant, and it is important to acknowledge. But that still means that 80 percent of the benefits remain in place. And these are vast.

Remember the Doha free trade deal? It’s completely off the radar today: The mood is so entrenched against free trade that even the concept of this global deal being revived is simply unimaginable.

But if it could be brought back to life, negotiated and completed, it would make the world $11 trillion richer each and every year by 2030 according to research commissioned by my think-tank, Copenhagen Consensus.

Even if we accept that 20 percent of this benefit would be countered by losses, and only 80 percent of the benefits were to remain in place, this remains a phenomenal policy worth some $9 trillion to humanity. These benefits are not restricted to any one group, but extend around the globe.

Free trade is undoubtedly good for the world’s poor, who would have new opportunities to thrive and prosper. The increased wealth from the Doha deal would be equivalent to an extra $1,000 for every single person every year in the developing world by 2030. This would cut the number of people living in poverty by 145 million in just 12 years.

Free trade is also good for consumers in rich countries: Walk into any store today, and the variety of goods you see is unimaginable in a world with borders between every nation and no free trade.

No country, not even the largest or most prosperous, is able to make every product as efficiently as effectively as we can with global value chains.

This effect has been quantified. It has been shown that middle-class Americans gain more than a quarter of their purchasing power from foreign trade. This means the average middle-class American can buy 29 percent more with each dollar, and the effect is even bigger — 62 percent — for the poorest tenth of Americans. This is what is put at risk by a trade war.

Free trade is even good for exporters and workers in wealthy nations: The Council of Economic Advisors has shown that on average, U.S. export-intensive industries pay workers up to 18 percent more than non-exporting firms.

There are less-expected benefits from knocking down the barriers between nations: Free trade has been shown to create more jobs for women, reduce employment discrimination and lead to better human-rights conditions.

There are environmental benefits, too: While increased production increases pollution, the higher income drives better technology and more stringent regulations, which in turn reduces pollution by some 12.5-15 percent.

Free trade creates shocks and challenges to any economy, which are cruelly concentrated. These effects need to be acknowledged. We need to make sure enough money is spent in hot-spots, to help the newly worse-off to transition out of jobs and industries that are displaced.

But if we focus on the 20 percent of benefits that can be eroded, we risk missing the 80 percent of the benefits that stand: benefits that extend to the world’s poor, rich consumers, workers and even the planet.

Africa is wisely working toward freer trade. If the rest of the world could get back on the same page, everyone would benefit.

Bjorn Lomborg is president of the Copenhagen Consensus Center. He was named to TIME magazine’s 100 most influential people in 2004. 

Tags Commercial policy consumerism economy Extreme poverty Free trade International relations International trade North American Free Trade Agreement Protectionism trade agreement Trans-Pacific Partnership

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