Economic Effects on U.S. Economy of Removing All Import Restraints

1. Introduction

During the recent decades the world economy has seen rapid growth which was mainly due to the increasing international trade. The rising international trade results from the technological development but also from the reduction of trade barriers, or liberalization. Indeed, liberalization is a very powerful tool to promote economic growth and development and what is also very important to reduce poverty. The evidence on this is clear. No country in the recent decades managed it to increase the standards of living for its people without being open to the rest of the world. So, outward-oriented countries grow much faster than countries that are inward-oriented. There is also one finding that the benefits of trade liberalization can exceed the costs by more than a factor of 10.

The U.S. Treasury Secretary John Snow told the members of the Development Committee, a forum of the World Band and the IMF, that removing trade barriers under the Doha Round negotiations is the greatest step the U.S. government can take to generate increased growth and poverty reduction. He also noted that the U.S. has already one of the least restrictive trade regimes in the world and this is not only beneficial to the U.S. consumers but also to the exporting countries and the individuals and families whose living standards increase with new and better paying jobs.

2. Liberalization

2.1 The general effect

To understand how a removal of trade barriers can result in an increase in growth and therefore in living standards one should analyze the general effects that liberalization usually has on an economy. Therefore one should imagine that all import restraints are eliminated. This of course will lead to a decline in real prices for the imported goods because the prices are reduced by the amount that previously had to be paid as a tariff. This leads to a price wedge between the domestic good’s price and the imported good’s price. It is obvious that consumer prefer buying the goods that are imported than paying more for the domestically produced goods. Domestic producers respond to this new situation by lowering their prices in order to stay competitive in the market. However, some of them are less willing to supply the market and simply go out of business. Others are not able to lower the prices and still generate profit and have also to leave the market. As this scenario takes place, the output and employment decline in the liberalized sectors. The demand for the liberalized goods increases further because prices of imported and domestically produced goods both have declined. Foreign producers are happy to satisfy the demand as the real price they receive rises again. But this all has a positive effect on the U.S. exports. The demand for U.S. products increases abroad as the prices for these goods decline. So the U.S. is more competitive in the world market.

2.2 The welfare effect

An important question comes up when analyzing the general effects of liberalization of trade. How is it possible that a country benefits by removing all import restraints if a lot of people lose their workplace and output falls? To answer this, it is important to know what the welfare effect actually is. It simply measures the net value of all gains and losses from trade liberalization on the economy as a whole. This means gains or losses in labor or capital income, tax increases or decreases, as well as the consumption effects from changes in real prices.

Again one should imagine that all import restraints are removed. As a result the freed capital and labor move to sectors where they can be used more efficiently. Consumers and producers have also to pay less for goods that previously have been subject to import restraints. The lower prices are reinforced by higher average income levels under the reallocation of capital and labour. Therefore, the cost of living falls relative to average income resulting in a net increase in welfare.

3. Economic effects of removing significant import restraints on

3.1 Individual sectors

But what exactly would happen to the U.S. if significant import restraints would be removed, one can best see by looking at the following table showing the impacts of liberalization on the individual sectors. Changes in employment, output, imports, exports and the composite price are considered and estimated by the simulation of liberalization.

The individual sector liberalization shows that the largest increases in imports tend to occur in sectors with the largest barriers, namely textiles and apparel