Trade Policy and Global Poverty

July 20, 2005

The stakes of the poor in trade policy are large: free trade can help 500 million people escape poverty and inject $200 billion annually into the economies of developing countries, according to author William R. Cline.

This study shows how changes in trade policies in the United States and other industrial countries could help reduce poverty in developing countries. Cline first reviews the extent of global poverty and its relationship to trade and growth. He then examines the key components of these relationships to identify lines of trade policy action that could help reduce global poverty.

Cline introduces the concept of “poverty intensity of trade” as a gauge of the potential for the trade policy instrument to affect global poverty. He examines the evidence on recent regimes of trade preferences for poor countries, including the European Union’s All but Arms initiative, and the United States’ Caribbean Basin Initiative and African Growth and Opportunity Act, and outlines steps to enhance especially the latter.

Cline judges that the developing countries were right to risk collapse of the Doha Round at the Cancún ministerial meeting in September 2003 by insisting on much deeper liberalization of agriculture than the industrial countries were then willing to offer.

He then reviews access of developing countries to markets in developed countries. Based on a “general equilibrium” model of world trade he calculates the potential impact of multilateral trade liberalization on unskilled wages and poverty in developing countries. After further taking into account the concentration of the world’s poor in the agricultural sector, as well as the recent evidence relating trade openness to growth, he arrives at estimates of the extent to which global poverty could be reduced over the next decade or two under alternative trade policy scenarios.

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