Tuesday, January 18, 2011

Quantifying the Stagnation of US Trade Policy (and Hoping for Better in 2011)

Last week the Heritage Foundation released its 2011 Index of Economic Freedom - a veritable treasure chest of data for econo-nerds everywhere.  The top-line news emerging from the study is that the United States - in 9th place overall and thus earning the less-than-stellar label of "mostly-free" - continued to lose ground on economic freedom, while much of the rest of the world gained.  Hong Kong once again lead the pack, while Canada expanded its lead over the United States and remained North America's reigning economic champ (something your humble correspondent kinda-sorta predicted last year).

But for my purposes, the really interesting data lie in the Index's review of global "trade freedom" - a score based on a thorough analysis of each country's tariff and non-tariff barriers.  In these data, we see that, while the rest of the world is liberalizing as quickly as possible, the United States continues to stand still (and even retreated a little).  Heritage's Terry Miller and Bryan Riley provide the first part of this story - the "good news" part - in their analysis:
The 2011 rankings of trade freedom around the world, developed by The Heritage Foundation as part of its annual Index of Economic Freedom, show average trade freedom at its highest level to date. Since 1995, the average score out of a possible 100 has grown from 56.7 to 74.8—an impressive 31.9 percent improvement over the 17-year period. The average score improved 0.6 point from the 2010 rankings, a significant achievement given the worldwide reces­sion from which most countries were emerging....

In the 2011 Index, 85 countries improved their scores and 58 coun­tries declined, resulting in a “gainers to losers” ratio of 2.36 to 1. Countries whose scores changed by at least one full point demonstrated a simi­lar trend, with 39 countries improv­ing and 18 regressing....
Miller and Riley go on to demonstrate that more trade freedom means lower poverty, more equality and more wealth, and they conclude by smartly recommending that:
Whenever possible, countries should unilaterally reduce trade barriers that protect politically pow­erful elites at the expense of the gen­eral population. They should also continue to improve on multilateral trade agreements. Free trade will create more freedom, prosperity, and equality for everyone around the world.
Be sure to read the whole thing here; it's well worth your time.  However, the guys at Heritage leave out the other, more depressing, part of the story: while the rest of the world is racing to lower their barriers to free trade in order to reap the benefits from trade that Miller and Riley point out, the United States is stuck in neutral, embarrassingly remaining the 38th most trade-liberalized country in the world - tied with economic powerhouse Namibia and behind such bastions of free trade as Malta and Lithuania.  (Canada, by the way, ranks 8th overall.)

A review of the raw data from 2009-2011 makes this problem even clearer.  The United States' raw trade freedom score dropped 0.4 points between 2009 and 2011, thus making us a little less free today than we were two years ago (and last year).  Meanwhile, almost all of the 37 countries ahead of (or tied with) us in 2011 got freer over the same period:

As you can see from this chart (made by me with Heritage's data), the trade policies of only three countries ahead of (or tied with) the United States regressed between 2009 and 2011.  As already mentioned, the US also regressed, while every one else liberalized (and reaped the benefits therefrom).

Of course, anyone paying attention to US trade policy over the last two years already knew this from the mounds of anecdotal evidence presented on this blog and other (more reputable) outlets.  As I grumbled a few weeks ago:
Obama has placated his anti-trade base (and their congressional muscle) on Buy AmericanMexican TrucksChinese Chicken ImportsSection 421 (tires)Section 301 (Chinese "green" subsidies)changes to US trade remedies laws,carbon tariffs - the list literally goes on and on.  He shelved his early 2009 support for the Colombia and Panama FTAs (and KORUS until last June) at the first whiff of congressional stink.  He has embraced mercantilism and adopted a "trade policy" in the NEI that is as unoffensive as it is ineffectual. 
Meanwhile, the rest of the world has pursued bilateral and regional free trade agreements at a breakneck pace.  Thus, it's no surprise that the new Heritage data show the United States stagnating on trade while the rest of the world surges ahead.  Indeed, it'd be a shock if the numbers showed anything else.

A lot of pundits and prognosticators are optimistic that this upsetting trend will change course in 2011, and that the Obama administration will finally engage on free trade and help the United States live up to its reputation as the world's free trade leader.  Recent talk from the administration on KORUS, zeroing and Mexican trucks appears to confirm this conventional wisdom, but it's only a start.  A real change of course on US trade policy will require real action to back up the White House's nice words, as well as new trade liberalization policies to catch us up with the rest of the world.

I sure hope that the conventional wisdom on US trade policy in 2011 turns out to be correct because if things don't change soon, we'll all be pining for the good ol' days when the United States sat pretty in 38th place.

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