Policy Liberalization and US Merchandise Trade Growth, 1980-2006

Working Paper
May 2009

The global economic and financial crisis 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 liberalization. On account of falling income worldwide, trade flows are shrinking, sometimes quite sharply. Hufbauer and Adler warn that protectionist initiatives, on top of crisis losses, would be a colossal mistake. Going slow on policy liberalization (tariff and nontariff barrier liberalization) is almost as bad.

Using various data sources, a simple partial equilibrium analysis, and a more complex computable general equilibrium analysis the authors find that roughly 25 percent of US merchandise trade growth since 1980 can be attributed to policy liberalization. Tariff and nontariff liberalization play a larger role in US export growth (35 to 40 percent) than US import growth (25 percent). The authors find that policy liberalization has supplied the lion's share of the "extra" trade growth­ since 1980-i.e., growth above and beyond growth that can be explained by expanding GDP in the United States and abroad. Tariff liberalization accounts for about 45 percent of the "extra" trade growth: 9 percent through multilateral tariff liberalization, 18 percent through preferential liberalization, and 19 percent through unilateral liberalization. Nontariff barrier liberalization also plays a large role in US trade growth. Multilateral liberalization has achieved a great deal and could be the dominant force for the future reduction of nontariff barriers. The World Trade Organization (and the General Agreement on Tariffs and Trade before it) has sharply constrained quotas, technical barriers, sanitary and phytosanitary barriers, and other nontariff barriers.

Policy liberalization is critical to the future growth of US and world trade. If policy liberalization grinds to a halt, a powerful engine of economic growth will sputter. A great deal of policy liberalization remains to be accomplished. Developing-country tariffs are far from zero, and developed countries still have high tariff peaks that restrain trade. Nontariff barriers represent a formidable wall of protection, and their removal would certainly boost trade.