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CEPR Basic Economics Seminar Series

Mark Weisbrot
October 13, 2005
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ð Standard economic argument for trade
liberalization: Theory of Comparative
Advantage (David Ricardo, 1817)
ð Shows that countries can gain from
specialization and trade according to
comparative advantage
ð True even if one country has an p

p p
p in psectors of production
 i
 

Dp  Wine Cloth
 


England 120 100
Portugal 80 90

ð Portugal has a comparative advantage in wine

(80/120 < 90/100)
ð England has a comparative advantage in cloth
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ð Both can gain from specialization and
trade
ð Portugal gives up one unit of cloth and
produces 90/80=1.125 units of wine
ð England adds one unit of cloth and
produces 100/120=-0.833 units wine
ð nternational prices adjust and
consumers of both countries gain
 @



 
 
 
 
ð Assumes full employment
ð gnores distribution
ð Development involves
p

 comparative
advantage to higher value-added production
ð Other caveats and problems
ð
ote: Gains from trade here (efficiency
gains) accrue from opening to imports, not
from capturing export markets


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1. According to standard economic models, removal of

 of the rich countries' barriers to the merchandise
exports of developing countries ²including
agriculture, textiles, and other manufactured goods ²
would result in very little additional income for the
exporting countries.


 @  
 |
 
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$%   &
'(  
 , when

such changes were fully implemented by 2015, they
would
)%* 
+#

,  .
3. This means that a country in Sub-Saharan Africa that
would, under present trade arrangements have a per
capita income of $1000 per year in 2015, would
instead have a per capita income of $1006.
 !#  
  


  

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!
 
  - 


  
 %

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 #  .

1. Some countries will be hurt by the elimination of

quotas that now allow them to sell a fixed amount of
exports at a price that exceeds the competitive market
price.
 | 
  
 #  .

2. Trade liberalization changes the relative prices of

various goods, and some countries will find that their
export prices fall relative to the price of imports (the
"terms-of-trade" effect).

3. Some developing countries currently benefit from

access to cheap, subsidized agricultural exports from
the rich countries.
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!
.
1. Developing countries incur substantial problems from
reducing their trade barriers. n many developing
countries, tariff revenue accounts for 10-20 percent of
government revenue, and in some cases considerably
more.
2. f tariffs are reduced or eliminated, these countries
will have to impose large increases in other taxes in
order to keep their budgets in line.
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  # 

 
!
.

3. The removal of trade barriers is also likely to lead to

large disruptions in agriculture. Standard economic
models implicitly assume that these people are re-
employed in other sectors of the economy, but rapid
import liberalization can lead to substantial
unemployment and underemployment, as well as
dangerous levels of social and economic instability.
 
@  .

1. Recent trade agreements, such as the TR PS

provisions in the WTO, have sought to impose U.S.-
style patent and copyright protections in developing
countries. The World Bank's estimates indicate that
the cost of TR PS to developing countries is likely to
be comparable to any gains they might receive from
trade liberalization.
 
@  .

2. As a result of increasing instability in world financial

markets, developing countries have felt the need to
vastly increase their holdings of foreign exchange
reserves. The opportunity costs of these increased
reserve holdings are also of the same magnitude as the
World Bank¶s projections for the benefits of trade
liberalization.
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Aew economists or policy-makers are
advocating free trade where the gains would
be largest:

1. Commercial agreements (WTO,
AATA) increase

some barriers to trade (e.g., on pharmaceuticals)
while reducing others
 Aew economists or policy-makers are
advocating free trade where the gains would
be largest:

2. The cost of increased protectionism on some goods

from these agreements can exceed the efficiency
gains from reduced barriers on other goods

3. Gains from liberalization in professional services

(doctors, lawyers, dentists) are huge compared to
those from WTO liberalization in merchandise
trade
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ð oss of manufacturing jobs, not replaced with
jobs of similar pay
ð Reduced bargaining power for workers
ð Over the last 30 years, productivity increased
by 81 percent but median wage by only about
9 percent
ð Even if a fraction of the increased wage
inequality over the last three decades is due to
trade, it would exceed the gains from trade
liberalization for most U.S. employees.
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.

 




1. f the dollar is 25 percent overvalued, that is

the same as putting a tariff of 25 percent on
U.S. exports p
p 
p giving a
20 percent subsidy to foreign manufacturers
exporting to the U.S. market

2. U.S. has lost more than 3 million

manufacturing jobs since 2000
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3. ³Strong dollar´ policy has cost millions of

manufacturing jobs and hurt U.S. workers
more than trade agreements

4. Reasons for the overvalued dollar

 i
 

ð Baker, D and Weisbrot, M (2002). ³The Relative mpact of

Trade iberalization on Developing Countries,´ Washington,
DC: Center for Economic and Policy Research.
http://www.cepr.net/publications/trade_2002_06_12.htm

ð Anderson, K and Martin, W (2005). "Agricultural Trade

Reform and the Doha Development Round," Washington,
DC: World Bank.

ð Stiglitz, J (2003). ³Globalization and ts Discontents,´

ew York,
Y: W. W.
orton & Company.
 i
 

ð Wallach,  and Woodall, P (2004). ³Whose Trade

Organization?: A Comprehensive Guide to the World Trade
Organization, Second Edition,´
ew York,
Y: The
ew Press.

ð Baker, D and Weisbrot, M (2004). ³Aool's Gold: Projections of

the U.S. mport Market,´ Washington, DC: Center for
Economic and Policy Research.
http://www.cepr.net/publications/trade_2004_01_08.htm

ð Baker, D and Weisbrot, M (2004). ³Poor
umbers: The mpact

of Trade iberalization on World Poverty,´ Washington, DC:
Center for Economic and Policy Research.
http://www.cepr.net/publications/trade_2004_11.htm
 i
 

ð Polaski, S (2006). ³Winners and osers: mpact of the Doha

Round on Developing Countries,´ Washington, DC:
Carnegie Endowment for nternational Peace.
http://www.carnegieendowment.org/publications/index.cf
m?fa=view&id=18083&prog=zgp&proj=zted

ð Wise, T and Gallagher, K (2006). ³Doha Round and

Developing Countries: Will the Doha deal do more harm
than good?´
ew Delhi, ndia: Research and nformation
System for Developing Countries.
http://www.ase.tufts.edu/gdae/Pubs/rp/HiddenCostsApr0
6.htm