GTAP Resources: Resource Display
| GTAP Resource #1592 |
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"Modeling the Impact of Trade Liberalization on Global Poverty" by Cline, William Abstract This chapter has implemented one of the leading CGE models (Harrison, Rutherford and Tarr, HRT), coupled with the leading trade and protection database available for trade modeling (GTAP5), to estimate the factor price changes and hence changes in poverty that could be expected to result from international trade liberalization. The results show that trade has a large potential to reduce global poverty. In the static free trade version of the model, free trade would reduce the number of poor globally by an estimated 110 million, or by 4 percent. In the “Steady State” version of the model, which captures an important dimension of dynamic effects by allowing capital investment to respond to new trade opportunities, the medium-term reduction in poverty could amount to about 500 million, or by about 17 percent. The static estimate is likely a lower-bound estimate for free trade effects. A simple model for the response of rural and urban poverty to free trade in agriculture alone, developed in Chapter 3 above, places the central estimate at a reduction of 200 million in poverty from removing protection and subsidies in agriculture. The dynamic Steady State estimate, on the other hand, is likely an overstatement for practical purposes, because it would imply large increases in capital that in turn would require boosts in investment by about 7 percent of GDP annually for 6 years. Even so, the Steady State estimate does not include effects on productivity growth and technical change, which could be a partial replacement for the large capital increases otherwise needed. Chapter 5 draws together the static and Steady State poverty estimates in combination with dynamic productivity-impact estimates developed in that chapter. Several important additional features in the model estimates include the following. First, agriculture is the most important sector to liberalize globally. It provides about half of total welfare gains from free trade. Second, textiles and apparel comprise the next most important sector. They contribute about 11 percent of total welfare gains under free trade. Third, developing countries gain the most from free trade, which generates welfare gains equal to 1.35 percent of GDP for developing countries and 0.78 percent for industrial countries, in the static model, and 2.5 percent of GDP for developing countries versus 1.0 percent for industrial countries in the dynamic Steady State version. Fourth, concerns about adverse effects for numerous developing countries identified in earlier results should be allayed by the present results. The HRT model’s authors estimated in 1996 that the Uruguay Round cuts in protection would cause welfare losses for sub-Saharan Africa, the Middle East, and Eastern Europe. They attributed the losses to higher agricultural prices facing food importers and to losses of quota rents in textiles and apparel. The new results here applying the same model to more recent trade and protection data with greater disaggregation for developing countries finds instead that all of these areas gain from global free trade. The difference from the earlier results stems in part from lower estimates of textile-apparel quota rents in the more recent data, and from application of free trade rather than the limited reductions in protection for agriculture and textiles and apparel in the earlier estimates. The only developing country estimated to experience loss is Mexico, where global free trade means a loss of preferred status in the US market. Fifth, model results for alternative liberalization scenarios suggest that a “differential” formula in which industrial countries grant free trade while developing countries cut protection only in half could generate welfare gains for developing countries that are about the same or even modestly larger than those from full free trade, but only if the developing countries grant free trade access to each other as part of such a package. This result depends in part on the special features of the model, suggesting that it is at least as likely that full free trade would generate better results for developing countries and their poor. Sixth, results from “asymmetric” liberalization tests suggest that between 52 percent and 65 percent of total potential welfare gains for developing countries stem from liberalization of industrial country markets rather than developing-country liberalization. This finding contradicts the view that developing country losses from global protection are primarily of their own making. The driving force in this finding is that the HRT model provides terms-of-trade impact estimates that are larger than in the widely-cited results of the World Bank (LINKAGE) model, although not as large as those in the less-reported findings of the OECD (GTAP) model. The latter attributes an even higher fraction of developing country gains to industrial country liberalization than estimated here. Seventh, the Steady State results underscore how important it will be that global capital markets achieve renewed strength to provide capital flows to developing countries. A return to capital market flows to emerging markets on the order of $250 billion annually, reached before the financial market crises of the late 1990s, would potentially provide somewhat more than half of the extra capital required to raise the capital stock and achieve the large potential dynamic welfare gains (some $350 billion annually for developing countries). Overall, these results confirm that trade liberalization could contribute in a major way to the reduction of global poverty. They also serve to remind, however, that even in the most optimistic formulation (the medium-term Steady State version), freeing up trade would provide only a partial solution to the problem of global poverty. |
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Last Modified: 8/11/2025 8:05:27 AM
