Peterson Institute publications
The Peterson Institute for International Economics is a private, nonprofit, nonpartisan
research institution devoted to the study of international economic policy. More › ›
RSS News Feed Search

News Release

Global Free Trade Could Lift 500 Million People Out of Poverty

June 17, 2004

Contact:    William R. Cline    (202) 416-0726

The elimination of tariffs and other protective barriers globally would:

  • lift at least 500 million people out of poverty over 15 years;
  • create long-term economic benefits to developing countries of $200 billion per year; and
  • enable industrial countries to convey about twice as much gain to developing countries as they currently provide through foreign aid—at a benefit rather than cost to their own consumers.

Liberalization of agriculture would account for about half of the total gains for both developing and industrial countries. These are the central conclusions of Trade Policy and Global Poverty by William R. Cline, a new study published today by the Center for Global Development and the Institute for International Economics.

Would freer trade rescue an important portion of the world’s poor from their poverty? Though few would argue that globalization has only winners and no losers, this book answers the question with a resounding yes. The recent Uruguay Round of negotiations, completed in 1994, promised to phase out textile and apparel quotas but left their tariffs high and more generally continued the pattern of only meager advances in liberalizing sectors in which developing countries have a comparative advantage, especially agriculture. The current Doha Round was therefore designated the “Development Round” to show international commitment to a stronger realization of potential benefits for developing countries.

Almost 3 billion people, or half the world’s population, live on $2 per day or less. Global concessional assistance from rich to poor countries amounts to about $50 billion per year. But the rich countries could provide even larger benefits to developing countries by removing protection against imports from them. Cline estimates total long-term income gains to developing countries from global free trade at $200 billion annually. At least $100 billion of these gains, or twice the annual flow of aid, would arise from the removal of industrial-country protection.

The study first maps global poverty. About half the world’s poor are in China and India alone, and another one-seventh in just four countries with more than 100 million poor each—Indonesia, Pakistan, Nigeria, and Bangladesh. About one-fourth of the world’s poor are located in what may be called “at-risk” countries: the least developed countries (LDCs), heavily indebted poor countries (HIPCs), and sub-Saharan Africa (SSA).

Cline proposes a “poverty intensity of trade” metric as useful for gauging the potential impact of trade policy in industrial countries on the global poor. This measure would be 100 percent for imports coming from a country with an entirely poor population and zero for imports from a country with no poor (at the $2 level). Industrial-country imports from all developing countries have an average poverty intensity of 33 percent when weighting by the “headcount” percent of population in poverty in each country but only 7 percent when weighting on the basis of share in national income going to the poor. In contrast, imports are much more poverty-intensive from the at-risk countries (LDCs, HIPCs, and SSA), at a range of 60 to 70 percent on a headcount basis and 40 to 50 percent on an income share basis.

This analysis suggests a two-track strategy for international trade policy. In the first track, there would be phased deep reduction or elimination of protection on a multilateral basis by all countries. In a parallel second track, there would be immediate free market access for imports from the at-risk countries, where the potential impact on the poor would be the greatest. Middle-income countries would participate in the liberalization offered on both tracks. Because the base of imports from the at-risk countries is small (ranging from 4 percent of imports from developing countries for Japan to 6 percent for the United States and 8 percent for the European Union), any adjustment problems in industrial-country markets from the deepening of existing special-access arrangements to immediate complete free access would be minimal, as would any likely trade diversion away from other developing countries.

Economic growth is the ultimate source of poverty reduction, and increased export opportunities spur growth. As examined in chapter 1, on average 1 percentage point of additional growth translates into a 2 percent reduction in the number of poor. This “growth elasticity” of poverty is higher when the ratio of average per capita income to the poverty threshold income is higher but lower when the degree of income concentration is higher. The highest response of poverty reduction to growth tends to be in Asia, where incomes are relatively equally distributed, while lower responsiveness is found in Latin America (where inequality is greater) and Africa (where average income is closer to the poverty level).

The study next reviews past experience with regimes of preferential market access. It finds that the Generalized System of Preferences (GSP) has tended to have little effect because of product and country exclusions but that more intensive special regimes have had more positive effects on developing-country exports. These include the European Union’s Lomé Convention and the United States’ Caribbean Basin Initiative (CBI), Andean Trade Preference Act (ATPA), and African Growth and Opportunity Act (AGOA) arrangements.

Chapter 3 then examines industrial-country protection against imports from developing countries. Protection is highest in agriculture. The combined effect of subsidies and tariffs amounts to a tariff-equivalent of about 20 percent in the United States, 50 percent in the European Union and Canada, and 80 percent in Japan. Although much public attention has focused on subsidies, tariffs tend to be even more important. For example, in the European Union the tariff-equivalent of subsidies is 10 percent, but agricultural tariffs average 33 percent (table 3.9).

In manufactures, textiles and apparel are confirmed to be the main locus of protection and tariff peaks. Tariffs range from an average of 9 percent in Japan and about 12 percent in the United States and the European Union to 16 percent in Canada, maintaining substantial protection even though quotas under the Multi-Fiber Arrangement are scheduled to expire in 2005. When all agricultural, manufacturing, and raw materials products are combined, the Aggregate Measure of Protection against developing countries is relatively low for the United States at 4 percent but substantial in the European Union at about 10 percent and in Japan at about 16 percent (table 6.1). These protection levels are unlikely to be overstated by much because of duty-free entry for LDCs and SSA, because the shares of these countries in total imports from developing countries are simply too small to affect the aggregates by much.

Elimination of agricultural tariffs and subsidies in industrial countries would boost world agricultural prices because domestic production would decline and import demand rise in these countries. Poor farmers globally would gain from higher incomes, but poor urban workers would lose from higher food prices. Because about three-fourths of the world’s poor are located in the rural sector, on balance global poverty would decline, by perhaps as many as 200 million people. It turns out, moreover, that concerns about losses for food-importing developing countries have been exaggerated. Most of the world’s poor live in countries that are net agricultural exporters. Even most of the LDCs (with the notable exception of Bangladesh) have comparative advantage in agricultural goods and so should benefit rather than lose from a rise in world agricultural prices following industrial-country liberalization.

Agricultural liberalization is found to be crucial to potential welfare gains from free trade, accounting for about half of the total for both the industrial and developing countries. For all products combined, between one-half and two-thirds of developing countries’ estimated gains from global free trade are found to arise from the removal of protection in industrial countries. This has been a controversial point, with some asserting that the great bulk of protection costs to developing countries are the result of their own protection and that they therefore shot themselves in the foot last September at Cancún when they temporarily derailed the Doha Round. Instead, their veto at Cancún was a sensible strategy to force meaningful liberalization where it matters most: in industrial-country agricultural markets.

The model estimates place the traditional “static efficiency” gains from global free trade at $90 billion annually for the developing countries. Dynamic gains are even larger. Open trade contributes to more rapid productivity growth over time. A survey of the literature in chapter 5 concludes that for each one percent increase in the ratio of trade to GDP, long-term output per capita rises by almost one-half percent. In addition, investment rises in response to trade liberalization from lower protection on imported capital equipment and new export opportunities. When all of the effects are taken into account, Cline estimates that 540 million people would be lifted out of poverty over 10 to 15 years as a consequence of global free trade (table 6.2). This would reduce global poverty by about one-fourth from the level otherwise expected by 2015. This estimate does not include the further impact of liberalizing trade in services, which could be large.

A blueprint for successful conclusion of the Doha Round set forth in chapter 6 includes the following main components. First, the industrial countries would commit to deep reductions in tariffs, including in agriculture and in textiles and apparel. Second, they would also commit to “decouple” agricultural subsidies from production and exports. Third, at least the middle-income developing countries would commit to major cuts in their own protection (e.g. by at least 50 to 60 percent). These liberalization commitments would all be phased in over several years. Fourth, the “second track” of trade policy would grant a head start to the at-risk countries (LDCs, HIPCs, and SSA) by giving them immediate free market access. Fifth, also in this track the industrial countries would adopt tax incentives for direct investment in these countries.

The second-track measures would not only serve to focus early liberalization where it would have the most potential to reduce poverty but could also help address one of the potential obstacles to a successful outcome: the concern of LDCs and some other poor countries that they stand to lose more from erosion of their existing trade preferences than they stand to gain from further multilateral liberalization. Moreover, a tailored run of the model suggests that this concern is misplaced. These countries would tend to gain enough from liberalization of their own markets, and from new market access in countries not currently granting free access (including middle-income countries), to more than offset erosion of the preference margin from existing special access in the US and EU markets.
Overall, Cline finds that global free trade can make a major contribution to reducing global poverty. For the world’s poor, the stakes are thus high that policymakers in both industrial and developing countries seize the opportunity offered by the Doha Development Round.

About the Author

William R. Cline holds a joint appointment as a senior fellow at the Center for Global Development and the Institute for International Economics. He has been a senior fellow at the Institute since its inception in 1981. During 1996–2001, while on leave from the Institute, he was deputy managing director and chief economist of the Institute of International Finance. Previously he was senior fellow, the Brookings Institution (1973–81); deputy director of development and trade research, office of the assistant secretary for international affairs, US Treasury Department (1971–73); Ford Foundation visiting professor in Brazil (1970–71); and lecturer and assistant professor of economics at Princeton University (1967–70). Among his publications are Trade and Income Distribution (1997), International Debt Reexamined (1995), The Economics of Global Warming (1992), United States External Adjustment and the World Economy (1989), The Future of World Trade in Textiles and Apparel (1987), and International Debt: Systemic Risk and Policy Response (1984).

About the Center

The Center for Global Development is a nonprofit, nonpartisan institution dedicated to reducing global poverty and inequality through policy-oriented research and active engagement on development issues with the policy community and the public. The Center's Board of Directors includes distinguished leaders of nongovernmental organizations, former officials, business executives, and some of the world's leading scholars of development. The Center's President, Nancy Birdsall, works with the Board, the Advisory Committee, and its own senior staff in setting research and program priorities, and approves all formal publications. The Center is supported by an initial significant financial contribution from Edward W. Scott, Jr., and by funding from philanthropic foundations and other organizations.

About the Institute

The Institute for International Economics, whose director is C. Fred Bergsten, is the only major research center in the United States that is devoted to global economic policy issues. Its staff of about 50 focus on macroeconomic topics, international money and finance, trade and related social issues, and international investment, and cover all key regions—especially Europe, Asia, and Latin America. The Institute averages one or more publications per month; holds one or more meetings, seminars, or conferences almost every week; and is widely tapped over its popular Web site.