What Does Research Say About Trade Liberalization?

As of now, both major presidential candidates oppose the Trans-Pacific Partnership trade deal. Trump’s position isn’t all that surprising, while Clinton’s is a complete flip-flop.1 With trade openness being challenged in both American politics and abroad, it’s important to review what scholarship says about free trade. For example, a new IMF report demonstrates the benefits of trade liberalization. After speaking favorably of TPP, the authors explain,

Past multilateral trade liberalization rounds have helped boost productivity, so these recent agreements—albeit not global—could do the same, given their broad geographic coverage, both as a percentage of total world GDP and total world trade. Policymakers, however, need to be mindful of the distributional effects of open trade and take steps to mitigate the impact on those displaced to realize the full potential of lower trade barriers on productivity and economic well-being.

As shown below in Chart 1, even in advanced economies, which have already liberalized tariffs in the past, further reductions in nontariff/regulatory barriers to trade and FDI offer scope for additional productivity gains.

The authors then cite the “wide consensus that liberalization of trade and FDI [foreign direct investment] can lead to improved resource allocation across firms and sectors, boosting productivity and output. For instance, existing evidence suggests that more-productive firms tend to gain market share at the expense of less-productive firms. But two specific effects of liberalization additionally enhance productivity:

  • Increased competition: Lower trade and FDI barriers on final goods can strengthen competition in the liberalized sector(s). This can help firms exploit economies of scale, improve efficiency, absorb foreign technology, and innovate.
  • Enhanced variety and quality of available inputs: Trade liberalization can also boost productivity by increasing the quality and variety of intermediate inputs used in final goods production.”

There are substantial gains in productivity to be had with the lowering of tariff barriers:2

In summary,

Our findings provide a case for further liberalization to raise productivity and output in advanced economies. That the estimates vastly understate potential gains by overlooking the much larger economic benefits of easing non-tariff barriers makes the case all the stronger.

While compensation programs may be in order for those who suffer job loss or wage reduction due to increased trade (something the authors acknowledge and suggest), this should not distract us from the massive gains that trade liberalization brings. Those seeking to be the “Leader of the Free World” take note.