Willful Ignorance: The Struggle to Convince the Free Trade Skeptics
IMF News, May 18, 2004
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- Published: May 18, 2004
Overview and purpose
- Address by Anne O. Krueger, Acting Managing Director, International Monetary Fund, delivered to the Graduate Institute of International Studies, Geneva, May 18, 2004.
- Purpose: examine why opposition to trade liberalization persists despite theoretical and empirical evidence linking liberalized trade regimes to faster growth, rising living standards, and poverty reduction; explore what policymakers and institutions might do to persuade skeptics.
- Emphasis on listening to skeptics, understanding their arguments, and marshaling evidence rather than dismissing concerns.
Who the skeptics are
- Disparate coalition: anti-globalization protesters (concerned with environment, political accountability, big business, etc.), governments—especially in some developing countries—and special interest groups.
- Noted historical parallel: debate over the British Corn Laws (1815–1846) illustrating persistent motives (fear and vested interests).
- Observed absence of a clearly vocal consumer constituency in favor of liberalization.
Drivers of opposition
- Two principal motives: fear and desire to protect vested interests.
- Types of fear identified:
- Fear for livelihood (e.g., labor movements fearing job loss or lower wages).
- National security concerns (e.g., self-sufficiency in food).
- Fear about government revenue loss from customs tariff reduction (historical example: customs revenues nearly 40% of government revenues in 1846).
- Vested interests:
- Agricultural producers, manufacturers, organized labor, parts of services sector.
- Political capture by interest groups can lead governments to favor protection.
- Identity bias:
- Individuals and groups with identifiable losses (e.g., a town losing a factory) are easier to mobilize politically than diffuse winners (consumers or future workers in expanding export industries).
- Political tactics:
- Lobbyists deploy plausible-sounding arguments (environment, national defense, solidarity with workers, child labor concerns) to mask protectionist motives.
- Misleading statistics and omission of key facts can misdirect well-intentioned advocates.
Evidence on benefits of free trade
- Historical and empirical support:
- Postwar era: trade liberalization contributed to rapid and sustained expansion of world trade and growth.
- Merchandise exports: about 8% of world GDP in 1950; 19% in 2002.
- Warcziarg and Welch study of 133 countries (1950–1988): countries that liberalized enjoyed annual growth rates about one half of one percent higher after liberalization.
- Removal of trade barriers during the 1990s raised growth rates by 2.5% a year.
- Life expectancy gap between rich and poor countries: 30 years in 1950; around 10 years at the time of the address.
- Postwar multilateral institutions and principles (GATT/WTO, most-favored-nation) reinforced progressive liberalization.
- World Bank estimate: around two thirds of the benefits of a successful Doha round would accrue to developing countries.
Costs and distortions from protection
- Consumer harm:
- Tariff and non-tariff barriers raise prices for consumers; costs can outweigh benefits to protected minorities.
- Examples illustrating scale of costs:
- Annual support for agriculture and horticulture by 29 OECD members could pay for each of the 56 million cows in the OECD dairy herd to enjoy a first class air ticket around the world and provide each cow $1450 spending money for stopovers; in business class each cow could have $2800 spending money—annually.
- Each of the 2,300 jobs saved in the American sugar industry through import barriers in the 1990s is estimated to have cost around $800,000 per year.
- The 216 jobs saved by protection for the US benzenoid chemical industry implied almost $1.4 million per year per job.
- Producer-level and economy-wide costs:
- Protection raises input costs for other domestic producers (e.g., higher steel prices affect automakers).
- Protection can disadvantage domestic exporters by increasing costs of protected intermediate goods, enabling foreign competitors to be more competitive.
- Developing-country interactions:
- Developing country tariff barriers have often been higher against each other than industrial country barriers against the developing world.
- One study suggests barriers in other developing countries might account for up to 70 percent of the total tariffs levied on developing countries' industrial exports.
- Empirical evaluations often show protection fails to deliver intended outcomes (examples: U.S. auto industry VERs postponed restructuring; textiles and other protected industries did not halt decline).
Policy implications and institutional responses
- Need for better empirical analysis:
- Proper ex ante assessments of costs and benefits of protection are often missing; more empirical research on effects of protection can help inform public debate.
- Institutional change at national level:
- Example: evolution of Australia’s tariff/industry bodies into a Productivity Commission focused on economy-wide effects rather than narrow industry protection.
- Strengthen inputs from consumers and industrial users when assessing protection requests.
- Multilateral action:
- Multilateral liberalization makes governments' tasks easier, allows export-competing industries to form international alliances, and yields higher returns at lower cost than unilateral liberalization.
- Doha round stakes: wide range of studies suggest additions to global income ranging from several hundred billion dollars to around one trillion dollars.
- IMF role and the Trade Integration Mechanism (TIM):
- IMF’s Articles of Agreement: facilitate expansion and balanced growth of international trade to promote high levels of employment and real income.
- IMF consistently urges unilateral liberalization while strongly supporting multilateral liberalization (Doha round).
- TIM: new initiative to assist countries facing balance of payments difficulties as a result of multilateral trade liberalization; available whether or not country has a Fund-supported program.
- TIM designed like an insurance policy: only a very small number of countries likely to need assistance, but its existence aims to reduce policymakers' short-term fears and encourage embrace of Doha.
Recommendations and strategic messages
- Listen to skeptics, engage, and understand their concerns rather than dismissing them.
- Use rigorous empirical evidence and economy-wide cost-benefit assessments to counter misleading claims.
- Pursue institutional reforms that broaden decision-making inputs (consumers, industrial users) and shift assessments from narrow industry protection to overall economic welfare.
- Support multilateral trade liberalization (Doha round) as the most effective way to lock in gains and reduce risk of protectionist backsliding.
- Offer credible safety nets (e.g., TIM, compensation financed from gains) so that losers from liberalization can be compensated at far lower cost than the economy-wide losses from protection.
Conclusion
- Free trade is characterized as a win-win: large enough aggregate gains to enable compensation to losers; protection inflicts significant losses for modest and often illusory short-term gains.
- Convincing skeptics requires empirical research, institutional change, and narrowing the gap between governments' free-trade rhetoric and practice.
- A successful Doha round is presented as the best means to sustain postwar-style gains: reducing the risk of a return to beggar-my-neighbor protectionism, enabling new rapid growth, rising living standards, falling poverty, and helping turn the Millennium Development Goals into achievements.
Address by Anne O. Krueger, Acting Managing Director, International Monetary Fund, To the Graduate Institute of International Studies, Geneva, May 18, 2004.