Jeremy Warner:
Unilateral free trade is economically compelling, but no government could sustain the job losses
Tricky stuff, free trade. Leave or Remain, only the patronising pretend to know why people voted the way they did. Those reasons are typically multifaceted and not easily pigeonholed. But I’m willing to bet that when 56 per cent of the voters of Port Talbot decided for Brexit two and a half years ago, they would not have had foremost in mind the study by Economists for Free Trade (EFT) making the case for abolishing all tariffs on imported goods, or so-called unilateral free trade.
The ability to set tariffs as deemed appropriate is one of the new freedoms Britain will enjoy once it has left the European Union. Some economists see unilateral free trade as one of the big potential economic opportunities of Brexit.
The truth of the matter is, however, that it would not be at all helpful to Port Talbot, home to one of Europe’s largest steel mills. To the contrary, it would be utterly disastrous, according to the trade association, UK Steel. This is not because there would be any direct impact from abandoning tariffs. Unusually, steel already carries little or no tariff.
It is because around a half of all steel production goes to the automotive sector – which under unilateral free trade would lose its tariff protections from foreign competition – there is likely to be a big indirect impact. Without substantial state subsidy, a no-deal Brexit would soon become an existential threat to the likes of Port Talbot.
The people of South Wales are a magnanimous lot, and in voting for Brexit they may simply be taking one for the team, as in “I, Gareth Evans, will gladly lay down my job for the marginal reduction in food and component prices that removal of the EU tariff yoke might bring to the UK as a whole”.
Sarcasm aside, unilateral free trade is one of those ideas that looks fine, even compelling, on paper but would be a political nightmare in practice. In the scale of things, it wouldn’t matter very much if Port Talbot lives or dies. It doesn’t matter from a wider economic perspective if what remains of Britain’s once-proud ceramics industry is swept away by cheap Chinese imports, and it doesn’t matter if the hill farmers of Wales and Cumbria are put out of business by the removal of near 50 per cent EU tariffs on imported lamb.
It matters very much, however, to those directly affected by it. Real jobs and communities sacrificed for arcane economic theory? No thanks very much.
Yet that hasn’t stopped Liam Fox, the International Trade Secretary, floating the idea anew this week as a potential approach to a no-deal Brexit. To be fair, he’s not proposing full liberalisation himself. To suddenly expose sectors not yet ready for it to the full force of international competition would be a step too far, he says. If UK markets are entirely opened up to foreign competition, he would also deprive himself of bargaining chips in negotiating free trade with others.
The economic case for unilateral free trade is that by eliminating tariff and non-tariff barriers, you lower consumer prices and increase competition in the home market, thereby raising demand and productivity across the economy as a whole. Those that already practice something close – Australia, New Zealand, Hong Kong and Singapore – seem to prove the case. The dynamic effects can be impressive, allowing these economies to focus on things they do well, while discarding the internationally uncompetitive.
Modelling by Economists for Free Trade suggests that by going the same route, UK consumer prices would be 8 per cent lower and GDP 4 per cent higher after 15 years than otherwise. Treasury warnings of a 9.3 per cent hit to GDP over the same time frame have simply failed to factor in these potential upsides, EFT insists.
Others are sceptical. Analysis by the Institute for Fiscal Studies finds that the average tariff applied by the UK on the sort of stuff it imports is already low at just 2.8 per cent; the abolition of all tariffs would reduce prices faced by households by a mere 0.7-1.2 per cent.
Comparison is sometimes made with repeal of Corn Laws, which by making food prices much cheaper did indeed transform the UK economy for the better. But this is not 1846; things have changed hugely since then, with tariffs in aggregate shrunken to relatively insignificant levels worldwide. The more important barriers to trade come from non-tariff measures such as standards. Regrettably, these are strongly on the rise almost everywhere.
What is most astonishing about this debate, however, is that with just 50 days left until departure, the Government is still faffing around trying to make up its mind what it should do with tariffs. Is Brexit fundamentally an inward-looking Trump-like backlash against globalisation, or is it about escape from protectionism for the high seas of free trade? We’d like to think the latter; the workers of Port Talbot might think differently. As on much else, the Government seems incapable of making up its mind.