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Trade treaties are not essential for trade; the EU distorts the UK’s trade

My Times column on free trade the European Union:


The late Sir George Martin created substantial British exports. Had the import of his music to America been banned to save the jobs of US musicians, Britain would have missed out on some revenue but the American consumer would have been the biggest loser, missing out on the music. Trade benefits the importing country: that’s why it happens.

Frankly, we might as well be living in the 17th century, so antiquated are our current debates over trade, both here over Brexit and in America over the presidential nominations. Many current assumptions about trade were debunked more than two hundred years ago and then tested to destruction in the mid-19th century.

In the 17th and 18th centuries European governments were in thrall to “mercantilism”, the belief that the purpose of trade was (roughly) to push exports on to other countries in exchange for cash and so build up a surplus of treasure with which to pay armies to fight wars. So they sought to restrain imports with tariffs and bans, while encouraging exports with monopolies and gunboats. Britain’s Navigation Acts after 1651, and the chartering of companies such as the East India Company, were part of this policy.

Along came Adam Smith and made a different argument, that mercantilism punished consumers and the poor, while rewarding producers and the rich; that imports were a good thing because they raised people’s standard of living by giving them what they wanted at lower prices. With money to spare, consumers bought more things from producers, creating jobs and generating prosperity. If bread was cheaper, people could afford more textiles. Gradually, with the help of David Ricardo and John Stuart Mill, Britain was persuaded of this and by the time Robert Peel, William Ewart Gladstone and Richard Cobden were in charge, Britain had declared unilateral free trade and dared the world to follow.

France, Italy, Switzerland, Norway, Spain, Austria and the Hanseatic cities followed suit and dismantled their tariffs. Prosperity followed, but after the Franco-Prussian war Bismarck and others began rebuilding competitive tariffs. Ever since, we’ve been in thrall to the idea — anathema to Cobden — that a country disadvantages itself by dismantling barriers to imports without demanding reciprocal favours. Yet, unlike unilateral disarmament, unilateral free trade works.

For much of the postwar period, mercantilism was kept in check by the insistence on multilateral trade agreements, and the most-favoured nation principle (invented by Cobden): that if you offer low tariffs to one partner you must offer them to others. But with the stalling of the Doha Round of the World Trade Organisation negotiations, we are increasingly back to a world of regional trading treaties, like Nafta, TPP and TTIP (if this ever happens).

The debate is increasingly dominated by zero-sum mercantilist noises, again. You would think, listening to the Remain campaign bleating on about whether Britain would need a trade deal like Canada’s or Switzerland’s when it left the EU, that trade is something arranged by governments; that it is illegal without a trade treaty; that exports count more than imports; and above all that the European single market is a free trade area. It’s not: it’s a customs union — a fortress protected by an external tariff. And it’s shrinking as a share of world trade.

Within that fortress there is free trade, but at inflated prices, in things we do not have much comparative advantage in — food and manufactures — and no free trade in the things we do have a comparative advantage in: services. That’s why we have a large, and growing trade deficit with the rest of the EU.

Increasingly the cheapest and best manufactures are made in Asia, and the cheapest and best food grown in South America and Africa, so if we stepped outside the fortress, outside the external tariff, British consumers would see an immediate and growing dividend. Our producers, on the other hand, would see little change because the services we sell to the rest of the continent are not covered by the single market anyway.

Professor Patrick Minford of Cardiff Business School argues in a recent study that the single market distorts Britain’s economy, making us “produce more of what we are worst at and less of what we are best at, while our consumers have to pay excessive prices”. If Britain left the EU it would gain about 4 per cent of GDP as a result, he calculates.

Contrast this with some of the things pro-Remain people are saying. Professor Tim Lang of City University argues that if people vote for Brexit, “there’ll need to be a ‘dig for victory’ on an unprecedented scale”. He’s imagining, bizarrely, that we would have to grow our own food. No, we could have free trade in food with the rest of the world. More than 70 per cent of the rice we eat is imported from outside the EU, yet an Indian rice farmer faces a high tariff barrier if he tries to export here (import duty on basmati rice is 9 per cent), while we subsidise Italian and Spanish farmers to grow expensive rice.

It is true that unilateral declarations of free trade, while benefiting everyone as consumers, can hurt those producers who have previously been protected from competition by tariffs and other barriers. Because the pain is more concentrated than the gain, their voice is louder, and Donald Trump and Bernie Sanders have been amplifying it. (America has never been as convinced by the free trade case as Britain: its infamous Smoot-Hawley tariffs of the 1930s worsened the depression and hastened war.)

Yet the effect of trade on jobs is no different from the effect of innovation. Just as imported Chinese goods have destroyed the jobs of British manufacturers, so threshing machines destroyed the jobs of farm labourers, washing machines destroyed jobs in laundries and Uber will destroy the jobs of taxi drivers, yet everybody was net better off. As the economist Professor Don Boudreaux wrote last week: “The case for free trade is simply part of the case for consumer sovereignty and competition.” Governments should certainly compensate people for locally destructive effects of changing trade or technology, but not by raising barriers against imports. That just punishes consumers and stifles economic growth. So forget treaties: almost three quarters of British trade is already conducted without treaties, anyway, under WTO rules.

Outside the EU, Britain could buy what it needs more cheaply and sell what it’s good at making.

By Matt Ridley | Tagged:  rational-optimist  the-times