Why Barriers Don’t Matter

A clear majority of global leaders, pundits and economists think more free trade is part of the solution to the global crisis. At the recent G20 summit, one prime minister after another promised to breathe new life into the latest series of negotiations to reduce trade barriers, dubbed the Doha round. Brazil's President Luiz Inácio Lula da Silva called it "the best solution to keep[ing] the financial crisis from spilling over to the real economy." Richard Haass, president of the Council on Foreign Relations, the establishment café of America's foreign-policy set, said last month, "I can't think of any better stimulus package than a trade agreement."

But it's not at all clear that a new free-trade pact would make much difference. A growing chorus of economists argues that since trade barriers are already at all-time lows, cutting a few more percentage points from already-low tariff levels won't add much to global prosperity. To many, this is a heretical notion—as recently as 2006, nearly 88 percent of American economists agreed that "the U.S. should eliminate remaining tariffs and other barriers to trade," according to one survey. But the other 12 percent are winning converts. "I think there's been a shift in the profession," says Paul Blustein, a trade expert at the Brookings Institution's Global Economy and Development Center. "The question of whether more liberalization is good and how to do it is now very much an issue."

Everyone with any credibility agrees that trade is good, protectionism is bad, and that we should solidify the gains made so far. Especially in light of the looming global recession, no one wants to fuel the potential for a new era of protectionism à la the 1930s, when the United States put in place the infamous Smoot-Hawley tariff. But reducing them further? The merits are debatable. "World trade is already so free, we're really talking about stuff at the margins," says Paul Krugman, a Princeton economist and this year's recipient of the Nobel Prize. "Once you are down to tariff rates as low as we have now, a few points up or down doesn't make much difference." Just as important, free-trade deals don't come cheaply; the world might be far better off spending its political capital on projects with a bigger bang-to-buck ratio.

In making their case, Krugman and others refer back to a hallowed economic dictum, the law of diminishing returns. Give a poor man $100, the law says, and he'll be ecstatic. Give a rich man $100, and he'll shrug it off. The marginal benefit of that $100, in other words, has diminishing returns, depending on how much you already have. This idea has a place in trade, economists like Krugman say. Cutting tariff barriers in half yields a lot of wealth and growth when their starting level is 150 percent. But today import tariffs on manufactured goods are about 5 percent in developed countries and 10 to 20 percent in developing countries; they've declined on average by 34 percentage points since the mid-1980s. Now a 50 percent cut in tariffs would yield little more than pats on the back for the world's trade negotiators.

Probably the most influential voice making this argument is Dani Rodrik, a Turkish economist at Harvard University. "We have a perfectly open trade regime," he says. "In no sense does it keep any country behind in terms of restraining its growth potential." The "astounding" changes in developing world tariff rates—down from 100 percent to 12 percent in India, for example—mean that most of the low-hanging fruit of trade negotiations has already been picked, says Rodrik.

New trade deals fail a simple cost-benefit analysis. Dropping tariff barriers and other forms of protection requires a highly complex piece of international choreography—the world's trade representatives have been at work on the Doha round since 2001, for instance, and still have no agreement. And the potential benefits might not be earth-shattering enough to warrant all the trouble. In a 2005 study, the World Bank reported that if trade were completely liberalized overnight, and agricultural subsidies (a sticking point in the Doha talks) completely eliminated, the world would be better off by about $287 billion by 2015—an increase of just 0.7 percent of global GDP. The benefits from the Doha round, which has humbler goals than complete liberalization, are far lower, ranging from as much as $119 billion to as little as $18 billion. The latter number represents just 0.04 percent of GDP.