Unilateral free trade is not the crazy idea its opponents claim
Perhaps it’s what Milton Friedman, the Nobel Prize-winning economist, described as the “tyranny of the status quo”. But the hysterical reaction from remainers and some notional freetraders to the Economists for Free Trade (EFT) report advocating unilateral tariff liberalisation after Brexit has been a sight to behold this week.
Boris Johnson has been mocked incessantly for claiming Britain could “have its cake and eat it” when it came to making an EU exit deal. These critics have their cake and eat it another way: suggesting on the one hand that tariffs are no longer the real impediment to trade, yet in the next breath forecasting a disaster should Britain decide to scrap the tariffs the EU currently imposes on our behalf.
The EFT pitch is essentially this: Britain after Brexit should exit the customs union and regain its independent commercial and trade policy. In an ideal world, we could negotiate the complete removal of trade restrictions worldwide. Perhaps in a second-best world, we’d have trade deals with every other country in the world. In the absence of either of these, and contrary to popular wisdom, the best strategy for the long-term health of the economy is actually to remove Britain’s own barriers to trade, irrespective of what other countries do.
This counter-intuitive result arises because tariffs and other restrictions tend to ultimately hurt importing consumers much more than exporting companies. As tariffs raise prices, the consumer is forced to either buy less of this good or less of some other good. The price increase can be thought of as a reduction in consumer income and choice – it hurts the economy negatively in three ways: through raising consumer prices directly, raising the cost of imports of intermediate goods and, more importantly, by insulating domestic firms from competition that enhances innovation and productivity.
Brexit, quite simply, gives us an opportunity to get rid of a host of this type of protectionism. As a member of the EU’S Common External Tariff, a dizzying array of more than 12,650 different taxes (and a host of quotas) are imposed on goods from the rest of the world on our behalf. These are set in an opaque and unclear way but, combined with other regulations and policies, contribute to agricultural and manufactured goods being substantially above world prices. Given these sectors represent around 11pc of UK GDP, the EFT pitch is that a consumer-focused policy of unilateral tariff elimination (irrespective of what other countries do) could both deliver substantially lower prices for consumers and, by opening up all sectors to global competition, enhance productivity.
Now, one can disagree and challenge how large this impact is likely to be. EFT estimates that unilateral free trade would raise GDP by 4pc in the long term, driven by an 8pc reduction in the consumer prices index. They estimate growth would subsequently be stronger, too. These results are dependent on the assumption of perfect competition. Critics point out that many markets are not competitive, with consumers valuing quality as well as price. But EFT points out that most of the “best value” for prices tends to come from South Korea and the US, hardly countries with particularly lax standards. In the long run, the assumption of competitive markets isn’t that controversial – see the overthrow from dominant market positions of companies such as Blackberry and Nokia.
This, then, should really be purely an empirical question – the economics itself, the idea of liberalisation, should not be controversial. Yet the reaction to the EFT report has led to a full spectrum of bizarre and misguided arguments for why trade barriers should be maintained. One is that
‘The best strategy is to remove Britain’s barriers to trade, irrespective of what other countries do’
unilateral reduction of tariffs is somehow akin to unilateral economic disarmament. Thinking of trade as some form of metaphorical war is simply wrong. Considering it a contest inevitably leads to bad policy predicated on protecting incumbent industries.
A variation of this is the idea that manufacturing and agriculture would somehow be “wiped out” if we removed tariffs. For sure, such industries would be opened up to competition. But countries such as New Zealand, with a far larger agricultural sector, have shown the sector can flourish and become more productive in a free-trading environment. Much manufacturing in the UK is already hi-tech and high value-added, and whilst lower value-added exporting sectors would struggle, their position is softened by the short-term fall in the value of sterling, providing a bridge to invest toward a more competitive environment.
Some say that unilateral tariff reductions would lower the incentive for countries to sign free trade deals with the UK. After all, without tariffs to “bargain away,” why would other countries bother to drop their tariffs? But EU exporting producers would suffer lower profit margins from a reduction in prices in the UK market, and the continuation of tariff-free trade is mutually beneficial. Both these factors would make the threat of unilateral tariff reduction more likely to encourage the EU to come to a free trade deal. With regards to the rest of the world, this criticism may be more valid, but there are a host of other areas where we would still be able to reach broader, mutually beneficial deals in other non-tariff areas.
A final critique is that existing tariffs are all necessary to meet so-called “strategic interests”. Such arguments seem a stretch, unless we are expecting 20th century blockade warfare. Very few people seem to know the rhyme or reason for the level and scale of many EU tariffs, many of which look overtly protectionist. Indeed, it should be incumbent on those who want to continue them to explain why. They certainly do not appear to be based on the best interests of the UK economy.
Of course, one can argue, as many economists have done, that unilateral tariff elimination cannot make up for the impact of leaving a highly integrated single market. The argument then becomes about the models of trade used and the assumptions underpinning them.
But given the Government is committed to leaving the customs union and single market, unilaterally removing trade restrictions should be a liberal ambition, not something to denounce. If competition at an EU level is so good for the economy, why not globally?