The trade war’s biggest losers: It’s poor people throughout the developing world
The trade war between the United States and China has prompted many commentators to focus on the economic pain that will be felt by the two sides: hitting U.S. consumers in the pocket, and causing pain for Chinese exporters. There are a small number of supposed winners, with production predicted to shift from China to countries like Vietnam, Cambodia or India.
But there’s a far bigger concern, which is that decision-makers across the world have shifted sharply against the most powerful global economic development tool ever been discovered.
Yes, free trade is good for rich countries: It has been shown that middle-class American consumers gain more than a quarter of their purchasing power from foreign trade. The effect is twice as large for the poorest Americans.
And yes, free trade is 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% more than non-exporting firms.
But what’s lost on too many people in this conversation is that, far more than any aid or development spending dished out by donor countries, lowering trade barriers is the most powerful way so far identified to reduce extreme poverty around the world.
It has been three years since the Doha free trade deal, the latest round of World Trade Organization negotiations, collapsed, after well over a decade. At the start of those discussions, the U.S.A. and Europe agreed to lower their trade barriers to promote development without requiring poor countries to reduce import barriers to the same extent.
As developing countries like China grew, rich countries demanded more from them. That led to a stalemate that ultimately derailed the entire agreement.
The tragedy is that the stubbornness from both sides — and today’s entrenched mood against free trade — has effectively thrown away trillions of dollars of potential growth. A completed Doha agreement would have made the world $11 trillion richer each and every year by 2030, according to research commissioned by my think tank, Copenhagen Consensus.
The world’s worst-off would have benefited the most. In developing nations, the increased wealth from the Doha deal would have been equivalent to an extra $1,000 for every single person, every single year by 2030. This alone would cut the number of people living in poverty by 145 million in just 12 years.
Of course, opposition to free trade doesn’t come from nowhere: Images of shuttered factories in the U.S.A. and Europe in the 1990s and 2000s have been particularly powerful in shifting opinions.
Every trade deal sees job losses, and some people who struggle to find other work. These human costs are often concentrated in specific places, such as in the American Midwest and the South. In rich countries, too many people and too many cities have been left behind, and not supported enough to regroup and rebuild after freer trade changed the playing field.
But rather than turning entirely against free trade, the lesson should be to be far more rigorous at providing support for those who need it. One study suggests that free trade increases income inequality, and that the cost of redistribution could erode more than 20% of the overall benefits that come from a free-trade deal.
But that still means that 80% of the benefits remain in place. It means that the Doha trade deal would achieve some $9 trillion for humanity. If only a small amount of this was spent supporting those who are affected negatively, the global benefits would still be profound.
There are myriad benefits from freer trade that we seldom think about. As economies open, previously sheltered companies will innovate and improve in order to compete.
What’s more, free trade has been shown to create more jobs for women, and to reduce employment discrimination. And while increased production increases pollution, rising incomes drive better technology and more stringent regulations, which in turn ends up cutting pollution.
U.S. and China might appear to be locked in a bruising economic battle. But the real tragedy is that it pushes even further away the well-managed freer trade that could benefit everyone so much more.