Trade Liberalization, Global Welfare And World´S Services Sector. By Cordula Thum
Jan 24, 2002

Economic experts have been trying to calculate the economic impact of further trade liberalization. Scenarios have ranged from optimistic forecasts to more pessimistic warnings. However, trade liberalization through tariff reduction of goods and barriers to the services sector promises returns for all countries, regardless of their stages of development.

A theoretical estimation of the benefits from a reduction of tariffs in a new WTO trade round has been made by a distinguished group of economists led by Prof. Robert Stern from the University of Michigan, and Prof. Drusilla K. Brown from Tufts University as well as Prof. Alan V. Deardorff from the University of Michigan. The authors come to the following conclusions: An assumed reduction of post-Uruguay Round tariffs on agricultural and industrial products and services barriers by 33 percent in a new WTO trade round would increase world welfare by $613.0 billion, with gains of $177.3 billion for the United States, $13.5 billion for Canada, $6.5 billion for Mexico, and significant gains for all other industrialized and developing countries. If there were global free trade, world welfare would increase three-fold to $1.9 trillion and the country/region gains would be similarly larger.

When a country opens its markets to free international trade, it benefits in several ways:

1) First, it enjoys static gains from trade. This gain to the economy can be divided into two parts: consumption gains and production gains. Since we are interested in the potential effects of trade liberalization on the value of the overall output produced by a specific country or region, we must look at the production gains (an example of that would be Stern’s recent analysis). These gains come about because productive resources are channeled into the economy’s comparative advantage industries; and because of this redistribution of resources, overall output produced (GNP) raises.

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