BuckeyeBlog

The Washington Post had a story today about how free trade is helping to move people in Colombia out of poverty. It’s a great reminder that the real way to help people in foreign countries isn’t foreign aid (which has a poor track record of success) but allowing them to sell goods to consumers in the U.S.

Of course, Democratic Presidential candidate Barack Obama is on record supporting increasing U.S. foreign aid but is opposed to a free trade deal with Colombia. Why would he be supporting spending more money on aid programs that will likely do nothing to help people but is opposing a deal that has demonstrable benefits for poor Colombians?

Economist Tyler Cowen had an excellent article in Sunday’s New York Times about why globalization fears are unfounded:

Trade advocates focus on the benefits of goods arriving from abroad, like luxury shoes from Italy or computer chips from Taiwan. But new ideas are the real prize. By 2010, China will have more Ph.D. scientists and engineers than the United States. These professionals are not fundamentally a threat. To the contrary, they are creators, whose ideas are likely to improve the lives of ordinary Americans, not just the business elites. The more access the Chinese have to American and other markets, the more they can afford higher education and the greater their incentive to innovate.

Conservative and liberal economists agree that new ideas are the fundamental source of higher living standards. We urgently need new biotechnologies, a cure for AIDS and a cleaner energy infrastructure, to name just a few. Trade is part of the path toward achieving those ends. A wealthier China and India also mean higher potential rewards for Americans and others who invest in innovation. A product or idea that might have been marketed just to the United States and to Europe 20 years ago could be sold to billions more in the future.

Those benefits will take time to arrive, but trade with China has already eased hardships for poorer Americans. A new research paper by Christian Broda and John Romalis, both professors at the Graduate School of Business at the University of Chicago, has shown that cheap imports from China have benefited the American poor disproportionately. In fact, for the poor, discounting in stores such as Wal-Mart has offset much of the rise in measured income inequality from 1994 to 2005.

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While it’s politically popular to attack free trade in Ohio, the reality is that freedom to trade and move freely has a variety of benefits:

Anderson looked at a number of econometric modeling scenarios and calculated the cost and benefits that would obtain from full trade liberalization under realistic assumptions derived from the current World Trade Organization’s Doha Development Agenda negotiations. Anderson estimated that liberalization of global merchandise trade would mean an annual increase of $287 billion per year in global GDP, of which $86 billion would go to developing countries. This compares very nicely with the $104 billion in development assistance that the governments of industrialized countries gave to developing countries in 2006.

In other calculations, Anderson found that the long term effects of trade liberalization would be that global income in 2098 would be up to 10% greater than it otherwise would have been. The associated net present values from freer trade range from $50 trillion to $424 trillion. Consider that in 2007, total gross world product was $53 trillion. In other words, both the immediate and long-term benefits from free trade are enormous. Anderson reports benefit cost ratios ranging from 269:1 to 1121:1.

Allowing workers to move from developing countries to rich countries also provides big benefits to both. Anderson cites a World Bank study which found that annual migration from now to 2025 of 560,000 workers and their families from developing countries to rich countries would yield global gains by 2025 amouting to $674 billion per year in 2001 US dollars. Most of the gain would go to the migrants, but natives would gain $138 billion in benefits.