Free Trade Versus Climate Action

Bjorn Lomborg is a believer in man-made climate change. But he is a realist when it comes to what will actually work for the world's poor.

On a previous post I mentioned the latest leaks from the IPCC that reveal a far more modest warming by centuries end. But as Lomborg points out, free trade is far more likely to yield benefits for the world's poor than collective government/market action.

Climate policies so far have proven to be extremely costly ways of helping very little and very far in the future. This is especially true for the world's poor.

Maybe we should start thinking about the other Doha negotiation that started 11 years ago, on global free trade, which could help the world's poor many thousands of times more.

Models from the World Bank show that even the least ambitious agreement to liberalise trade further and reduce agricultural subsidies would generate substantial benefits. The classic argument for free trade holds that specialisation and exchange benefits everyone, because goods are produced where they are produced best.

The bank's models show that this so-called static benefit could increase annual global GDP by several hundred billion dollars by the end of the decade, with perhaps $US50bn accruing to developing countries.

Towards the end of the century, the annual benefit would reach $US1.5 trillion, with half going to the developing world.

I remember investment legend Jim Rogers recently advised people to invest in Burma because its economy was newly opening and newly opening economies experience disproportionally greater growth.

But over the past two decades a growing number of studies have demonstrated that this is only a small part of the argument. History shows that open economies grow faster. Examples include South Korea since 1965, Chile since 1974, and India since 1991.

The same message comes from computable general-equilibrium models of the global economy: even modestly freer trade helps domestic markets to become more efficient, and helps supply chains to become better integrated and transfer knowledge more readily, thereby spurring innovation. Overall, this dynamic benefit increases the GDP growth rate.

In a recent review of the economics literature, one of the World Bank's leading modellers, Kym Anderson, showed that the long-run benefits from even a modestly successful Doha round of world trade talks would be vast.

Annual GDP in about 2020 would be about $US5 trillion higher than it would be in the absence of an agreement, with $US3 trillion going to the developing world.

Towards the end of the century, slightly higher growth rates will have yielded a cumulative increase in income exceeding $US100 trillion annually, with most going to the developing world.