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November 20, 2010

Free Trade Fights Wealth Concentration

By and

When President Obama was still candidate Obama, he traveled to Berlin to share his foreign-policy views with Europeans. "Trade," he told them, "has been a cornerstone of our growth and global development." "But," he added, "we will not be able to sustain this growth if it favors the few and not the many."

Good news, Mr. President. It turns out that trade does benefit the many.

A new study of global trade policy and economics from the Heritage Foundation shows that free-trading countries enjoy the strongest economies. Even better, the resulting prosperity is more widely shared in those countries than in countries with large barriers to free trade.

Put simply, there is more wealth — and less income disparity — in free-trading nations than in protectionist nations.

Heritage's Index of Trade Freedom rates countries on a 1-to-100 scale on the extent to which their laws and policies encourage free trade with other nations. In general, 80 is a good score in terms of trade freedom; 72 or less is bad.

Heritage then compares those scores to the World Bank's wealth-concentration index. The researchers found that the 10 countries with the highest concentration of income in the hands of the richest 10 percent earned an average trade-freedom score of 70.2. The 10 nations with the least concentration of income averaged a trade freedom score of 84.1 — more than 20 percent higher.

The numbers indicate that nations truly interested in "spreading the wealth" should reject protectionism and embrace free-trade policies.

Free trade is an effective way to boost overall prosperity as well. The world's 10 poorest countries averaged 64.5 on the Heritage free-trade scale. The 10 with the highest per capita gross domestic product, or GDP, averaged 87.

These findings are hugely important, especially now, when free trade is under attack in a way not seen in decades. More Americans than ever work in import-export-related jobs, yet polls indicate the percentage of Americans who say free trade is good for the economy fell from 78 percent in 2002 to 59 percent in 2007. Skepticism as to the benefits of free trade has grown among all income and age groups.

This trend may well accelerate as people get increasingly nervous about rising foreign investment in the U.S. from China and other sovereign wealth funds. Voters and policymakers alike expressed outrage when the Chinese energy firm CNOOC tried to purchase the U.S.-based Unocal and reacted similarly when DP World tried to purchase operations at six U.S. ports.

But those calling for greater restrictions on trade and investment should be reminded of what happened the last time we tried protectionism. In 1930, during an economic crisis to which the present situation has been endlessly — and inappropriately — compared, Congress passed the Smoot-Hawley Tariff Act. It imposed tariffs on 20,000 products, igniting an international trade war. Other countries swiftly retaliated with tariffs on U.S.-made products.

The result: World trade declined by two-thirds, millions of Americans lost their jobs, and the Great Depression began in earnest. The economic misery didn't abate until World War II.

Leaders of the world understand this, even when their people don't. For all the talk of free trade being "unfair to workers" and "detrimental to prosperity," countries have embraced free trade as never before. The average score on Heritage's Free Trade Index nudged higher again this year, to 74.8 — the highest since the foundation began tracking this data in 1995. Over the past decade, 142 countries have improved their scores; just 11 have gone backward.

Even with protectionist fever swirling, 85 countries improved their scores on the freedom index this year — 39 by a full point or more — and 58 regressed.

Within weeks of his speech in Berlin, candidate Obama went on CNBC and declared himself "a market guy." And so far, he has resisted calls from protectionists to clamp down on trade with China for practices some consider unfair.

But the "market guy" has shown some fear of commitment to free trade. He asked Congress to set aside work on a free-trade agreement with Korea, has sat on pending pacts with other countries and has suggested repeatedly that U.S. workers stand to get a bum deal from free trade.

That's not what the numbers show, however. Around the globe, when countries embrace free trade, the nation prospers, and the wealth spreads more freely and equitably among the people. If that's what the "market guy" truly wants, he shouldn't be so shy about letting the market do its thing.

Terry Miller is director of the Heritage Foundation's Center for International Trade and Economics, where Bryan Riley is the Jay Van Andel senior analyst in trade policy.

First appeared in The Washington Times

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