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The Payoff from Free Trade

It's an article of faith for most economists that freedom of trade pays off in economic growth. Their faith is supported by hard numbers in a study from the free-market-oriented Fraser Institute in Vancouver, B.C. The study, written by economists James D. Gwartney of Florida State University and Robert A. Lawson of Capital University in Columbus, Ohio, finds that countries with the freest trade had the highest gross domestic product growth from 1990 to 2000. The top fifth of countries ranked by freedom of trade had average annual per capita GDP growth of 2%, adjusted for inflation, from 1990 to 2000 (chart). The bottom fifth on the free-trade scale saw inflation-adjusted GDP per capita grow a mere 0.2% annually during that period.

Gwartney and Lawson define freedom of trade--or "openness"--to include low tariffs, a currency that's easily convertible, a high percentage of imports and exports relative to GDP given the country's size, and fairly unrestricted capital markets. Openness is one of several criteria that figure into their annual Economic Freedom of the World country rankings.

Richer countries tend to be more open than poorer countries. The top fifth of countries ranked by openness had an average per capita GDP of $23,401 in 2000. That's more than twice the $9,852 average for the second quintile, and more than six times the $3,621 of the 20% of countries with the most restrictive trade conditions.

There are some surprises in the rankings. The U.S. comes in at 23rd out of 116 countries in openness, well behind No. 1 and No. 2: Hong Kong and Singapore. "Hong Kong and Singapore have fewer tariffs and quotas than the U.S.," observes Gwartney. Japan and China rank just below the median for openness.

The rankings also reflect the importance of free trade to smaller countries, which have to reach outward to benefit from economies of scale in production. And geographically small countries are likely less able to produce their own raw materials, so there's less internal pressure for protectionism by commodities producers. Critics of globalization have long alleged that multinationals essentially export pollution to developing countries by putting their dirtiest operations there.

A new study says that isn't true. Gunnar S. Eskeland, a researcher at the World Bank, and Ann E. Harrison, an economist at the University of California at Berkeley, say that, for one, the cost of pollution control just isn't high enough to warrant international relocation. From the 1970s through the early 1990s, the average amount U.S. manufacturers spent to comply with pollution-control laws was about 1% of their total costs, according to Eskeland. Even basic chemical industries with the highest costs of keeping clean spent only about 3% of their total costs on pollution control. "There are so many other factors that are much more important than pollution costs, such as the size of the domestic market," says Harrison. For instance, she says, China is attractive more for the size of its domestic market than for its relatively lax pollution-control laws.

And multinationals operating in developing countries often have the cleanest factories in the market. That's partly because their factories are newer and they have the capital to spend on the best machinery, which is usually also the cleanest. But it's also because multinationals are aware that they have to please the crowd back home, no matter where their factories are.

Between shareholder and consumer activists, pressure on corporations to treat the environment well rose significantly during the 1990s, reckons Harrison. "They know there is an image issue," she says. "And eventually, the developing countries where they have their factories will have regulations similar to the developed countries." The latest numbers from the Labor Dept. show that the downturn in the job market over the past year was worse than previously believed. According to its annual benchmark revision of the data, nearly 1.8 million jobs were lost from March, 2001, when the recession started, to April, 2002, the most recently revised month. That loss is 23% higher than previously estimated.

Nevertheless, the new data show that some industries have added substantial numbers of workers. For example, mortgage banks and brokerages had to hire like crazy to meet the demand for housing finance. Measured from May, 2001, to May, 2002, employment in that industry rose by 12.4%.

Over the same period, job growth was surprisingly strong in management consulting and public relations, rising 4.4% despite the slowing economy. Employment in legal services continued to rise at a 2.7% clip. And the aging of the population and the loosening of managed-care cost controls helped hospitals post a 3.5% increase in employment.

But at the same time, the government figures show clear evidence of the technology bust. Payrolls at makers of electronic and electrical equipment fell 14.1%, while jobs at computer companies slumped by 13.2%.

And let's not forget about the effects of the bear market. Jobs at securities and commodities brokers fell 7.7% through May. Meanwhile, the recession caused companies to slash advertising, contributing to a 6.4% decline in the advertising-dependent printing and publishing businesses. All in all, it's been a pretty bad stretch for the job market.

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