Economic analyses lead to an incorrect assessment of the benefits of globalisation. According to ETH Zurich, a reduction of trade barriers mainly benefits rich consumers.
In many countries around the world, there are clear signs of resistance against globalisation. The "yes" of the British to Brexit and the withdrawal of the US from the Trans-Pacific Partnership are just two examples of the changing attitude to free trade. According to Sergey Nigai from ETH Zurich, there is an uneven distribution between the groups of consumers when welfare gains are achieved from trade.
Income inequality and heterogeneous trading profits
People with different income levels are developing different consumption patterns. The rich population typically consumes more industrial products and services, while poorer sections of the population spend the lion's share of their income on food, housing and other everyday essentials. Countries benefit from international trade due to increased access to cheaper goods, even if equal price reductions are anything but consistent for various products. The exact trading profits for a certain person thus depend on their own consumer package.
Industrial goods, e.g. clothing and electrical products, react more sensitively to falling international trade barriers than food. This is due to the fact that the cross-country distribution of productivity in industry is much broader than in the agricultural sector. The differences in productivity between companies that grow potatoes are, for example, much smaller than in the case of computer manufacturers. In essence this means that free trade is more favourable to the consumer groups which spend larger parts of their income on industrial goods and services than on food. Therefore, economic analysis in relation to the average consumer can result in a significant overstatement of the advantages for the poorer sections of the population and an underestimation of the benefits for rich sections. In the event of a reduction of trade barriers, richer customers benefit more than the poor.
The distribution effects of trade must not be overlooked. The trade policy is often influenced by economic analysis based on the summary of trading profits. Economists largely agree that lower trade barriers as a whole lead to higher profits, however, it is also important to recognise that trade brings far-reaching distribution effects with it. These effects must be taken into account in the assessment of possible gains from free trade, especially for countries with pronounced inequality.
ETH Zürich – Applied Economics
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