Cui Bono?

CUI BONO?….According to Dani Rodrik, a study by Bradford, Grieco, and Hufbauer suggests that removing all remaining barriers to trade would raise U.S. incomes anywhere from $4,000 to $12,000 per household. Wow! Let’s do it! I could use the extra money. But then Rodrik hauls out the heavy artillery:

First a reality check. The standard partial equilibrium formula for calculating the gains from moving to free trade is 0.5 x [t/(1+t)]^2 x m x e, where t is the tariff rate, m is the share of imports in GDP, and e is the (absolute value of the price elasticity of import demand). In the U.S. average tariffs stand in low single digits and imports are less than 20% of GDP. There is no way of tweaking this formula under reasonable elasticities that would get us a number anywhere near the Bradford et al. estimates. For example, using the generous numbers t = 0.10, m = 0.2 and e = 3, the gains from moving to complete free trade are a meager 0.25% of GDP (compared to Bradford et al.’s lowest estimate of 3.4% of GDP).

Damn. There’s a formula for calculating the gains from free trade? (A relatively simple one, too. I’m impressed. I always figured this stuff was done with rocket science computer models.) And even when you plug in generous variables it produces a gain of only 300 bucks per household? Hmmph.

Of course, 300 bucks a family still amounts to $30 billion or so. Divide that among a thousand super-rich families and that’s $30 million each. It doesn’t sound so bad when you put it that way, does it?

Via Mark Thoma.

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