Rx for slower GDP growth? Expand our freedom to trade

Globalization has stalled, and so has global economic growth. That is no coincidence, according to a report released today from the Organization for Economic Cooperation and Development (OECD).

Provocatively titled, “CARDIAC ARREST OR DIZZY SPELL: WHY IS WORLD TRADE SO WEAK AND WHAT CAN POLICY DO ABOUT IT?” the report is well worth reading in full, but here is the summary:

The slowdown in world trade growth post crisis, if sustained, will have serious consequences for the medium-term growth of productivity and living standards. Trade policy has significant potential to reinvigorate trade growth but the political environment for reforms is difficult, with a growing polarization of OECD electorates into pro- and anti- globalization supporters. Further trade and investment policy liberalization should be introduced as part of a wider package of structural reforms to spread the benefits of freer trade and investment more widely.

Also this week from across the Atlantic, the European Central Bank in a four-page briefing paper tried to explain why the growth of trade seems to have stalled worldwide. The phenomenon was captured in a chart in the ECB report, reprinted nearby. The ratio of global imports to GDP, so called “trade intensity,” has leveled off after rapid growth leading up to the 2008–09 recession.

The ECB’s explanation for the stall is two-fold: 1) trade has shifted to emerging economies, which tend to be less trade intensive than the advanced economies, and 2) global value chains are not expanding as rapidly, so not as many intermediate goods are crossing borders as part of the production process as would be if the previous trends had continued. To these the OECD study above adds a third: creeping protectionism in the major trading economies

And finally, closer to home, the Cato Institute just released its annual Economic Freedom of the World Report for 2016. A key finding is that economic freedom in the United States continues its retreat of recent years even as overall economic freedom in the world inched ahead in 2015.

In Chapter 6, the study finds that one of the leading components of the decline in U.S. economic freedom since 2000 has been in the freedom to trade internationally. The study noted the rise in regulatory, non-tariff trade barriers, and a decline in the free movement of capital and labor across our borders.

The chapter’s authors, Dean Stansel and Meg Tuszynski, plausibly conclude that this general decline in economic freedom has contributed to the under-performance of the U.S. economy during the same period:

No matter how you measure it, the health of the US economy has declined substantially since 2000, compared to the trend over the period from 1980 to 2000. That decline in the health of the economy has coincided with a substantial decline in economic freedom. While there are plenty of other factors that affect economic prosperity, it would be hard to argue that the decline in economic freedom has not had a negative impact on the economy.

During this election season, politicians are quick to blame outsiders, such as immigrants and our major trading partners, for causing all sorts of damage to the economy and U.S. living standards. In fact, numerous studies and real-world experience have shown that trade and immigration boost economic growth and raise living standards for the large majority of Americans. Instead of pointing blame at others, our political leaders should get their own policy house in order by reducing barriers to our freedom to trade internationally.