Free trade will always enrich our country
A lack of exports will not hold the UK back as long as we allow people to buy what they want
Hovering behind our Brexit anxieties is a belief that Britain isn’t up to it. We worry that we have become idle and inefficient. We haven’t run a trade surplus in 20 years. We don’t seem to make stuff anymore: manufacturing, despite a recent uptick, has fallen to 11 per cent of national output. Trade deals with China and India will open our market to places with much cheaper labour. Can we, who are used to faffing about for hours on our iPhones, compete with workers who put in 16-hour days assembling them?
Yes, we can. Indeed, we already do. We have been trading with countries with low wage costs for more than 200 years, and have become vastly richer in consequence. Our deficit in physical goods is more or less structural: we haven’t run a trade surplus in visibles since, astonishingly, 1821. Yet, in the years that followed, we became the wealthiest and most powerful nation on Earth.
How did we do it? Not by seizing large and hot tracts of land, which tended to be a net drain on the Treasury, nor yet by backing strategic industries. No, we did something much more straightforward. Starting in the 1840s, we removed our trade restrictions. We didn’t insist on reciprocity, because we understood that the chief gain from trade was not more exports, but more imports. As the price of food and basic commodities fell, ordinary people had more money to spend on other things. The standard of living rose in Britain as nowhere else: the masses began to buy cutlery and porcelain, and changes of clothes and glass windows. And, as they did so, whole new industries came into existence to meet the new demand.
It is important to understand why we benefit from commerce with more efficient countries. Most of us understand that, if Britain is good at financial services and China is good at making plastic toys, it makes sense to sell the Chinese our services and buy their toys. But what if the Chinese become better at both financial services and toys? What if they become more productive than us across the board? How can it still be in our interest to have free trade with them?
The answer was given precisely 200 years ago by a stockbroker and economist called David Ricardo, the son of a Jewish Portuguese immigrant who made a fortune by betting correctly on the outcome of Waterloo. His theory is known as “comparative advantage”, and has been called the only idea in the whole of the social sciences that is both true and nontrivial. Ricardo showed that it is often rational to buy stuff from elsewhere, even if you could have produced it more efficiently yourself. Winston Churchill, for example, was a great bricklayer: the trowelmanship on the wall he built around Chartwell is exquisite. But most of us can see that Churchill’s comparative advantage was as a politician, a speechmaker and, ultimately, a war leader. If he needed work done, it made sense for him to employ a builder – even though he, Churchill, might have done a better job than the builder.
Tomorrow, to mark the bicentenary of Ricardo’s counterintuitive idea, the Institute for Free Trade, of which I’m president, is holding a conference in the City to explore its full implications. The audience will be made up largely of parliamentarians, civil servants and trade officials from Britain and abroad – precisely the people who, if they were to act according to Ricardian principles, could add trillions to world output.
Even now, our government, like most governments, retains several rusty mercantilist structures that have survived since before we joined the EEC: an export finance agency, marketing boards and the like. We still intuitively believe that exports matter more than imports. In fact, as a study of 160 countries published this week showed, imports and exports rise and fall in lockstep. Imports, by creating greater efficiencies in production, will almost by definition facilitate exports – as well as improving people’s lives. It makes no sense to fret more about the one than the other.
The trouble is that dependency on foreigners offends our huntergatherer intuitions. Comparative advantage just feels wrong. When Donald Trump’s administration applied its moronic tariff against Bombardier, it was applauded for “protecting American jobs”. In fact, that tariff will destroy many more jobs in aviation and in the wider economy than it props up at Boeing. Every cabin attendant whose job would have come into existence would have had money to spend elsewhere. Every passenger whose ticket would have been cheaper would have used the surplus to boost other businesses.
That now won’t happen.
The worst possible way for Britain to respond would be to inflict on its own consumers the penalties that Trump is inflicting on Americans. Taxing your people for buying what they want always, in the long run, harms your country more than anyone else’s.
Whether or not we get a deal with the EU, we should dismantle our trade barriers and cut costs. It has worked for Australia and New Zealand in modern times, just as it worked for Britain in the Victorian age. Everyone becomes better off, with the biggest gains going to people on low incomes, who spend proportionately more on protected products.
Theresa May says she wants a post-EU Britain to “be the most passionate, enthusiastic and convinced advocate of free trade anywhere in the world”. Quite right. If we open our economy, we will flourish with or without an exit deal. If we don’t, Brexit will have been rather pointless.
‘Imports, by creating greater efficiencies in production, will almost by definition facilitate exports’