Policy liberalisation and US merchandise trade growth, 1980 – 2006

Matthew Adler, Gary Hufbauer 10 March 2009

a

A

In 1980, US two-way merchandise trade was $467 billion. By 2006, US two-way trade had grown more than five-fold in nominal terms, to reach $2,942 billion.1 During this period of rapid growth, the international economy continued its hurried pace of globalisation that began after the Second World War. The international economy became increasingly interdependent, as transportation and communication costs declined, multinational enterprises flourished, and trade barriers receded through multilateral, preferential, and unilateral initiatives.

Against this background, it seems worthwhile to evaluate the sources of past growth in US merchandise trade in order to make informed guesses about the future course of trade growth. Moreover, with G20 leaders meeting in a few weeks to discuss options for reviving the global economy, it is important to emphasise the role that policy liberalisation has played in sparking trade growth. Previous studies have shown the tremendous boon that trade can have for the real income of a country (Bradford, Hufbauer and Grieco 2006), and raising trade barriers – something most G20 leaders have sought to avoid – will only dry up a critical source of growth for the world economy.

In our paper, soon to be available on the Peterson Institute website, we use various data sources, a simple partial equilibrium analysis, and a more complex computable general equilibrium model to determine the shares of US trade growth over the last 25 years attributable to policy liberalisation, the decline in transportation costs, and, as a residual, income growth and unidentified technology – a basket category dominated by market forces, especially the remarkable expansion on multinational enterprises (MNEs).

To understand the sources of US trade growth since 1980, we analyse six different hypothetical scenarios, including:

  1. The reversion of current US and US partner tariffs to Uruguay Round bound tariff rates
  2. The reversion of current US and US partner tariffs to Tokyo Round bound tariff rates
  3. The return from current transportation costs to circa 1980 transportation costs
  4. The removal of current US preferential tariff rates
  5. The reversion of current non-tariff barrier (NTB) levels to circa 1990 NTB levels (Kee, Nicita and Olarreaga 2005)
  6. The reversion of current US and US partner tariffs to circa 1990 applied tariff rates

We conclude that roughly 25% of US merchandise trade growth since 1980 was due to policy liberalisation. This result is strikingly similar to Baier and Bergstrand (2001), who attributed 25% of world trade growth between 1960 and 1990 to policy liberalisation. The other 75% of US trade growth during 1980 to 2006 can be explained by the general expansion of the world economy (72%) and falling transportation costs (3%). Figure 1 provides an overview.

Figure 1. Total US Trade Growth from 1980 to 2004 Attributable to Various Sources

Evidently policy liberalisation has played an important role in trade growth. Moreover, econometric evidence strongly indicates that trade growth above and beyond the pace of GDP growth furnishes a powerful engine that drives the world economy. Our analysis, along with the work of others, demonstrates that policy liberalisation supplies the lion’s share of this “extra” trade growth.

Tariff liberalisation accounts for about 45% of “extra” trade growth. Preferential and unilateral tariff liberalisation have seemingly delivered more of a jolt than multilateral tariff liberalisation.2 Roughly speaking, the proportions are 9% of the “extra” growth through multilateral tariff liberalisation, 18% through preferential liberalisation, and 19% through unilateral liberalisation.3

Non-tariff barrier (NTB) liberalisation, as we measure it, also plays a large role in US trade growth – perhaps 44% of the “extra” growth – but we are less certain of NTB data than tariff data. However, since the current average level of NTB protection may triple that of tariff protection (for US imports 7.5% vs. 2.5%), the importance of fresh NTB liberalisation is substantial. Here is where multilateral liberalisation has achieved a great deal in the past and could prove to be the dominant force for future NTB liberalisation. The GATT and the WTO have sharply constrained quotas, technical barriers, sanitary and phytosanitary barriers, and other non-tariff barriers. More progress on these and other NTB fronts can be expected from future multilateral negotiations.

One surprising result, and a marked contrast from earlier decades, is that the decline in transportation costs contributed only 11% to “extra” trade growth since 1980.
Going forward, policy liberalisation will be critical to the future growth of US and world trade. If policy liberalisation grinds to a halt, a powerful engine of economic growth will also splutter. A great deal of policy liberalisation remains to be accomplished. Developing country tariffs are far from zero, and developed countries still have high tariff peaks that restrain trade. Non-tariff barriers represent a formidable wall of protection, and their removal would certainly boost global commerce.

But will future policy liberalisation occur? Or instead will we see policy reversion in reality, not just in a simulated exercise? The financial crisis that began slowly late in 2007 and erupted with a fury in late 2008 has awakened protectionist sentiments around the world. The Doha Round of multilateral negotiations has dropped far back on the “must-do” list. Policymakers seem more willing to accept new episodes of protection than to energetically seek trade liberalisation. On account of falling income worldwide, trade flows are shrinking, sometimes quite sharply. Export declines since July 2008 of 20% or more are common in Asia. Protectionist initiatives, on top of crisis losses would be a colossal mistake. Going slow on policy liberalisation is almost as bad.

References

Baier, Scott L. and Jeffrey H. Bergstrand. 2001. “The Growth of World Trade: Tariffs Transport Costs, and Income Similarity”. Journal of International Economics. 52 (2001) 1-27.
Bradford, Scott C., Paul L. E. Grieco, and Gary Clyde Hufbauer. 2006. “The Payoff to America from Global Integration.” In The United States and the World Economy, ed. by C. Fred Bergsten. Washington: Institute for International Economics.
Kee, Hiau Lee, Alessandro Nicita and Marcelo Olarreaga. 2005. “Estimating Trade Restrictiveness Indices”. World Bank Working Paper Series 3840. Washington: World Bank.
United Nations Comtrade Database (UNComtrade). 2008. Online subscription access. Public access available at: http://comtrade.un.org.


1 US exports in 1980 totaled $217 and imports were $250 billion. US exports in 2006 were $1,028 billion and imports were $1,913 billion (UNComtrade via WITS 2008).
2 The 45% role of tariff liberalisation is determined by taking the impact of the Tokyo Round scenario in the general equilibrium analysis ($275 billion) as a share of the “extra” trade growth ($605 billion), as determined by our computable general equilibrium calculations.
3 The 18% role of preferential tariff liberalisation is determined by taking the impact of Scenario 4 ($109 billion) as a share of the “extra” trade growth ($605 billion). The 19% role of unilateral liberalisation is determined by adding the difference between Scenario 1 ($171 billion) and Scenario 4 ($109 billion) to the difference between Scenario 2 ($275 billion) and Scenario 6 ($225 billion). Together, these two figures equal $112 billion, which is then expressed as a share of the “extra” trade growth ($605 billion). The 9% role of multilateral liberalisation is determined by subtracting the effect of preferential ($109 billion) and unilateral tariff liberalisation ($112 billion) from the impact of Scenario 2 ($275 billion) to arrive at a figure of $54 billion. This figure is then expressed as a share of the “extra” trade growth ($605 billion). Note that different arithmetic methods for evaluating the scenarios would suggest different roles for the three types of liberalisation.

 

a

A

Topics:  International trade

Tags:  trade policy, trade liberalisation

Research Assistant, Peterson Institute for International Economics

Reginald Jones Senior Fellow, Peterson Institute for International Economics

Events