Over the past week, we have looked closely at the benefits of international trade.  But in reality how open are countries to international trade?

Measuring trade openness can never be done with precision.  But estimates from the Heritage Foundation, World Economic Forum, and the OECD give us many insights.

The right wing US think-tank, the Heritage Foundation, calculates an index of trade freedom as one component of its index of economic freedom (a similar story emerges from the World Economic Forum’s “Global Enabling Trade Report 2009).  The other nine components of its economic freedom index are freedom in the areas of business, fiscality, government, monetary, investment, financial, property, corruption and labor.

Trade freedom is a composite measure of the absence of tariff and non-tariff barriers (NTBs) that affect imports and exports of goods and services (see below for more information on NTBs).  As an example, let’s take a look at China which received a trade freedom score of 72.2.  Based on its weighted average tariff of 3.9 percent, it would have got a score of 92.2.  But the existence of significant NTBs in China reduced the score by 20 points.

So which one of the 179 countries measured by the Heritage Foundation wins the global trade freedom race?  Well, it’s a tie for first place with Hong Kong, Singapore, Switzerland and Macau all scoring 90 points.  The list of countries scoring 85 or more points include Australia, New Zealand, Ireland, Canada, US, Denmark, Chile, UK, Mauritius, Luxembourg, Netherlands, Estonia, Finland, Island, Sweden, Austria, Germany, Georgia, Taiwan, Lithuania, Belgium, Czech Republic, Slovakia, Spain, Norway, Israel, Peru, Malta, Latvia, Hungary, Albania, Slovenia, Portugal, Romania, Turkey, Poland, Italy, Bulgaria, Namibia, Kazakhstan, Croatia, Papua New Guinea and Libya.  Poor Japan does not quite make it into this group with its score of 82.4!  Non-tariff barriers are its undoing.

Although trade is not the only motor of prosperity, it seems clear that open trading countries are in general richer than others.

Let’s have a look at the countries with the lowest scores for trade freedom.  North Korea comes last with a score of zero!  Other countries with a score below 65 include Zimbabwe, Cuba, Venezuela, Democratic Republic of the Congo, Republic of Congo, Iran, Guinea-Bissau, Kiribati, Comoros, Liberia, Togo, Chad, Sierra Leone, Seychelles, Lesotho, Central African Republic, Equatorial Guinea, Maldives, Syria, Djibouti, Bangladesh, Ethiopia, Guinea, Cameroun, Nepal, Tonga, Cote d’Ivoire, Sri Lanka, The Gambia, Gabon, Benin, Vanuatu, Bhutan, Tunisia, Bahamas and Barbados.

Again, it is pretty clear.  Those countries which are the least open to trade are generally relatively poor.

So, if it so clear that openness to trade is a positive thing for prosperity, why do many countries restrict trade?  First, some governments may never have studied international trade theory, and therefore not understand the great benefits of trade.  And some people have an ideological aversion to anything which sounds capitalist (like the French, for example).

The writings of Mancur Olson on the “logic of collective action” provide insights into why countries might implement trade protection.  Basically he argues that, even in a democracy, it is relatively easy for a small group of people to ‘gang up’ on the general interest, and convince the government to provide them privileges like protection against trade.  (Remember, that even though trade protection has a negative effect overall on a country, its effect can be positive for the group which benefits from the protection.)

By contrast, large groups (like consumers who suffer the costs of protection) will face relatively high organizational and transaction costs when attempting to defend their interests through collective action.  In addition, the value of their will be much lower in per capita terms than for the beneficiaries of protection.

This is a very powerful argument because it means that there are situations where a well organized minority can dominate the majority.  This is why the activities of research institutes and international organizations in calculating the costs of protection can be so valuable.  And why the activities of the media in making such information public are so important.  They are defending the interests of the silent majority!  Democracy matters.

In this context, it is very interesting to see that many of the most protectionist countries are also the least democratic.  In a 2008 report, the Economist Intelligence Unit classified countries into four groups, namely, full democracies, flawed democracies, hybrid regimes and authoritarian regimes.  And the very long list of authoritarian regimes includes North Korea, Chad, Turkmenistan, Uzbekistan, Myanmar, Central African Republic, Saudi Arabia, Guinea-Bissau, Libya, Guinea, Laos, Syria, Equatorial Guinea, Democratic Republic of Congo, Eritrea, Djibouti, Togo, Tajikistan, Vietnam, Zimbabwe, United Arab Emirates, Sudan, Iran, Qatar, Congo (Brazzaville), Yemen, Tunisia, Oman, Gabon, Afghanistan, Swaziland, China, Azerbaijan, Cote d’Ivoire, Algeria, Belarus, Angola, Bahrain, Kuwait, Niger, Kazakhstan, Cameroun, Cuba, Nigeria, Comoros, Burkina Faso, Rwanda, Morocco, Egypt, Mauritania, and Jordan.

The rich, developed countries do pretty well overall in terms of openness to trade.  But when it comes to the agriculture sector, it’s a different story.

Financial support for agricultural producers in the rich, advanced OECD countries is high.  According to OECD estimates, in 2008 it amounted to $265 billion or EUR 182 billion, as measured by the Producer Support Estimate (PSE). This is equivalent to 21% of aggregate gross receipts of OECD farm producers.

When you add it all up, it is even worse.  Total support to the agricultural sector, combining producer support (the PSE), support for general services to agriculture such as research, infrastructure, inspection, marketing and promotion, as well as subsidies to consumers, was estimated at $368 billion (EUR 271 billion) in 2006-08. This is equivalent to 0.9% of OECD GDP, down from 2.5% in 1986-88.

Although this has fallen in recent years, this was largely due to exceptionally high world agricultural prices, rather than explicit policy reforms decided by governments.  However, as the past and most recent experience shows once world prices begin to decline from extremely high levels, border protection and price-related domestic support measures once again become active.  Overall, producer support in OECD countries is at its lowest level since 1986.

Who are the guilty parties in agricultural protection?  While OECD famers received on average 21% of their total farm receipts in the form of subsidies, this average figure hides a multitude of sins.

The level of farm support varies widely across countries: it was 1% of total farm receipts in New Zealand, 6% in Australia, 10% in the United States, 13% in Mexico, 18% in Canada, 21% in Turkey, 27% in the European Union, 49% in Japan, 58% in Iceland, 60% in Switzerland, 61% in Korea and 62% in Norway.

As a share of each country's GDP, the figures seem low -- Korea 3%, Japan 1%, EU 1 % and US, Canada, Australia and New Zealand all under 1%.  But wouldn't be better to spend these subsidies on education, health or research and development?

What are the most heavily protected agricultural products?  The answer is rice, sugar, sheepmeat, beef and veal, pigmeat, poultry and so on.  Wouldn't make sense to give poor countries a chance in the development by letting them take over production in these areas?

So why can farmers manage to squeeze so much assistance out of our governments?  In many countries, the electoral constituencies are set up in such a way that sometimes a small number of farmers have disproportionate power – “gerrymandering”.  So politicians can basically buy their votes by providing subsidies.  Farmers have always been good at organizing their collective action.  And they have always been very creative in their protectionist arguments.  They preach the virtue of protecting the landscape and traditional values.  They can argue that foreign products are low quality or risk being poisoned.  They stress the importance of security of supply on uncertain international markets.

At one point years ago, the Japanese argued that they had longer intestines than Westerners, and thus these intestines needed to be protected against foreign products.

Do you believe it?

Such silliness is enough to convince anyone that free trade is the only sensible policy!  In fact, freer trade is gradually coming into agriculture.  Many reasons, but our governments are gradually going broke under the weight of ageing populations and the financial crisis.  They cannot afford silliness for much longer.

References:

2010 Index of Economic Freedom

http://www.heritage.org/index/

The Global Enabling Trade Report 2009

http://www.weforum.org/en/initiatives/gcp/GlobalEnablingTradeReport/index.htm

Agricultural Policies in OECD Countries: Monitoring and Evaluation 2009

http://www.oecd.org/document/54/0,3343,en_2649_33773_43202422_1_1_1_37401,00.html

The Logic of Collective Action: Public Goods and the Theory of Groups, Second printing with new preface and appendix (Harvard Economic Studies), by Mancur Olson Jr.

http://books.google.co.jp/books?id=jzTeOLtf7_wC&dq=logic+of+collective+action&printsec=frontcover&source=bn&hl=ja&ei=IVnOS9uzOcyLkAWW-ISVAw&sa=X&oi=book_result&ct=result&resnum=5&ved=0CBcQ6AEwBA#v=onepage&q&f=false

The Economist Intelligence Unit’s Index of Democracy 2008

http://graphics.eiu.com/PDF/Democracy%20Index%202008.pdf

(1)              NTBs can be: (i) quantity restrictions like import quotas, export limitations or voluntary export restraints; (ii) price restrictions like antidumping duties, countervailing duties or border tax adjustments; (iii) regulatory restrictions like licensing, domestic content and mixing requirements, sanitary and phytosanitary standards, safety and industrial standards regulations or packaging, labeling, and trademark regulations; (iv) investment restrictions like exchange and other financial controls; (v) customs restrictions like advance deposit requirements or customs valuation procedures; (vi) direct government intervention like subsidies and other aid, government industrial policy and regional development measures, government-financed research and other technology policies, national taxes an d social insurance, competition policies, immigration policies, government procurement policies, state trading, government monopolies, and exclusive franchises.