By Michael D. Smart, ’97
A new study by a BYU economist found that removing trade barriers in four key nations would inject about $50 billion into the United States’ economy annually while increasing income in developing nations by $150 billion a year.
“That is more than all the foreign aid that we give to them every year,” said Scott C. Bradford, ’87, assistant professor of economics, who reports his findings in a recent issue of The Review of Economics and Statistics, published by MIT. “The research fleshes out the idea that ‘trade more than aid’ is what these developing countries need. Efforts to work on multilateral trade openings are going to be worth it in terms of increasing wealth for the whole world.”
Bradford explains that all countries impose barriers to international trade. Some are obvious, like tariffs on imported goods. Others are more opaque, like burdensome customs procedures or labeling requirements. The barriers, usually levied to protect domestic producers from competitors abroad, end up creating such inefficiencies in markets that the costs to the country’s consumers outweigh the benefits to the protected producers.
He identified the costs of barriers by analyzing detailed price comparisons among various countries, then plugged those costs into a computer model of the world economy. This allowed the model to simulate trade without barriers imposed by the U.S., Japan, Canada, and Australia—the four nations for which enough data were available.
In addition to the benefits to the economies of the U.S. and developing countries, the model showed a yearly increase of $100 billion to Japan’s economy, which employs the most trade barriers among the nations studied and has been economically stagnant for more than a decade. Bradford’s more recent research, not yet published, shows similar results when including western European nations in the model.
Extra costs arise when restrictions or taxes are placed on imported goods. This artificially raises prices for consumers because it allows domestic producers to charge more, since they are not facing international competition.
“The price of sugar in the United States is 40 to 50 percent higher than it would be without these trade barriers,” Bradford said. “We’re preserving the jobs of sugar manufacturers in the U.S., but higher prices for consumers impose large costs on the economy.”
He notes that income gained by removing trade barriers would be more than enough to fund a generous wage subsidy program to help American workers who would lose jobs or must take lower paying jobs in the event of loosening trade.
“We need to keep working on liberalizing trade,” Bradford said. “We do need to be attentive to those who get hurt by free trade, but this research indicates we can help them and still come out well ahead, and at the same time help people in developing countries quite a bit.”