Spicing the Gains From Globalization With Product Variety
A version of this article was published in the European Voice on April 12, 2007.
Protectionism is in the headlines anew with the calls for the erection of trade barriers by some Democrats in the U.S. Congress and the support lent by Ségolène Royal and Nicolas Sarkozy – during the last presidential election in France – to an increased tariff barrier at the European level.
Protectionism is in the headlines anew with the calls for the erection of trade barriers by some Democrats in the U.S. Congress and the support lent by Ségolène Royal and Nicolas Sarkozy – during the last presidential election in France – to an increased tariff barrier at the European level. If these protectionist policies are effectively implemented, consumers will not only face higher prices of products, but also lesser choice among varieties of products – a fact which is often downplayed in discussions surrounding protectionism and globalization.
The traditional economic rationale against protectionism and in favor of globalization is that economic welfare increases with the (greater) opening of borders as heightened competition prompts domestic and foreign producers to lower the prices of the goods they offer to consumers.
Yet, alongside this traditional argument lies the ubiquitous, but seldom mentioned, fact that globalization also promotes economic welfare in a significant manner because it allows consumers to navigate among greater varieties of goods, notably those not available from domestic producers. For example, American consumers can buy Italian or French cheese, Irish or Mexican beer, beyond domestic varieties of these products.
The inextricable link between globalization and variety is not a completely modern one, though. It emerges indeed for the first time with « the story of the quest for spice, an early model of globalization, » as Paul Freedman, author of Flavor, Fragrance, and Fashion: Spices in the Middle Ages, argues. Much before Western Europeans launched their age of exploration and empire in the 16th century, there already existed a long and complex chain of market relations seeking to satisfy the European demand for spices. For instance, as early as the 14th century, the famous Florentine merchant Francesco Pegolotti lists no less than 288 imported spices in his Pratica della Mercatura.
The astounding variety of, and high demand for, spices invite an explanation. Paul Freedman discards the usual explanation, namely, that spices were mainly demanded in order to cover the off-taste of rotting meat. « Rather, » he argues, spices were prized « because Medieval cuisine placed a premium on a variety of flavors, which only spices could impart. » Although other factors – such as the medicinal properties of spices or the appetite for luxuries – also played a role, it was European consumers’ demand for variety in order to satisfy the requirements of the haute cuisine of that time that went a long way in making spices become the first globally traded product.
The modern era of globalization mirrors and extends the historical pattern established by the quest for spice. The dramatic expansion of international trade during the past decades has gone hand in hand with a proliferation in the number of imported varieties of goods. For instance, in a paper published in the Quarterly Journal of Economics in 2006, American economists Christian Broda and David Weinstein make a comprehensive analysis of the composition of U.S. imports from 1972 to 2001 and conclude that there was a more than threefold increase in imported varieties over this period. While the U.S. imported 74,667 varieties (that is, 7,731 goods from an average of 9.7 countries) in 1972, the number of imported varieties had spectacularly soared to 259,215 in 2001 (that is, 16,390 goods from an average of 15.8 countries).
What needs to be stressed, however, is that consumers value this greater product variety for its own sake, on the top of the lower prices that globalization also generates. Consider the example of coffee which the United States used to import from 25 countries in 1972 and now imports from 52 countries. When comparing varieties of coffee, American consumers may not think that one variety is necessarily better than others, but sometimes they would prefer one variety of coffee to others. The possibility of buying the variety of coffee they’re in the mood of makes them better off. From the most arcane to the most mundane good, and as the coffee example illustrates, consumers value having access to more varieties instead of being forced into making one-size-fits-all choices.
Yet, conventional gauges of consumer welfare, such as the consumer price index or the import price index, slough over the value of variety to consumers. What they measure instead is the current cost of a particular basket of goods relative to the cost of the same basket in some base period in the past. The economy-wide improvement in consumer welfare due to the surge of imported varieties had thus not been evaluated before Broda and Weinstein’s study. The authors provide indeed an estimation of the value of the expanded imported varieties to U.S. consumers between 1972 and 2001 that amounts to US $ 260 billion, that is, 3% of U.S. GDP in 2001! These huge welfare gains stemming from increases in imported varieties are actually three times greater than the estimates of traditional gains from trade that are confined to lower prices of existing goods following the dismantling of trade barriers.
During the past decades, globalization has induced a pattern of variety growth – along the lines of the one observed above in the U.S. economy – in almost all countries throughout the world, with corresponding positive impacts on consumer welfare. In any assessment of the gains from globalization and the drawbacks of protectionist policies, welfare gains entailed by this surge in imported varieties thus need to be stressed. « Variety is, » after all, « the spice of life, that which gives it all its flavor, » as the British poet William Cowper wrote in 1785.
Neel Chamilall is an economist at the University of Paul Cézanne, Aix-en-Provence, France, and an associate researcher at the Institut économique Molinari.