Why it is time to ditch free trade deals

To trade freely with the EU after leaving the single market and customs union, we will need to negotiate a trade deal. If we cannot, the UK economy will be in big trouble. This familiar line of thought is wrong. Free trade does not require trade deals between governments. People living in Leeds can now trade freely with people living in Bristol. Yet there is no trade deal between Leeds City Council and Bristol City Council. Suppose councillors decided to take an interest in trade between the two cities and struck a deal. Its terms could only create barriers to trade where there were none.

The same goes for international trade. If governments genuinely sought free trade, there would be nothing to negotiate. Each would simply refrain from creating any barriers to trade. This is precisely what the UK should do when it leaves the customs union. As Professor Kevin Dowd argues in a paper published by the Institute of Economic Affairs, the UK should adopt a policy of unilateral free trade. We should simply eliminate all tariffs on imports, regardless of what tariffs foreign countries impose on their imports from the UK.

This will strike many as a crazy policy – all give and no gain. But that is because they do not understand how free trade benefits a nation. The principle gain comes from cheap imports. Consider butter, for example. To protect European dairy farmers from more efficient foreign competitors, the EU now imposes a tariff of about £1.60 on a kilo of imported butter. That’s nice for inefficient European farmers, but it means British consumers pay more than they otherwise would. This means they have less to spend on other things, and total consumption falls. Nor is it only consumers who lose out. UK firms that would have sold things to consumers, if only they hadn’t spent their money on needlessly expensive butter, are also worse off.

To make the matter clearer, imagine that packs of butter began to miraculously appear in fridges around the country. Would the Government benefit us if it taxed anyone who used this butter by an amount slightly greater than its current retail price? Dairy farmers might be happy about the tax. But the country would have been needlessly impoverished. All the effort and resources that now go into making butter could have been liberated and put to other uses. Taxing this miraculous butter would be an act of self-harm.

Imported butter that arrives at half the price of domestically made butter differs from miraculous butter only in the size of the gain. Taxing it so that it costs more than domestically made butter is also an act of self-harm.

The gains that come from cheap untaxed imports are independent of foreign governments’ trade policies. Let them burden their populations however they wish, even by taxing imports from Britain. We British will still be better off if our government refrains from “retaliating” by similarly burdening us.

This unilateral free-trade policy has been adopted in Hong Kong, Singapore and New Zealand. They seek trade deals to improve access to foreign markets for their exporters. But regardless of what other governments agree to, they do not impose import barriers of their own.

Some fear that this unilateralism may put a country in a weak negotiating position. When recently trying to negotiate the Trans-pacific Partnership trade deal, a political commentator remarked that New Zealand was in the position of someone beginning a game of strip poker already naked.

It’s witty but it simply repeats the basic mistake of thinking of imports as the cost of trade. The goal of strip poker is to end the game with some clothes on. The goal of trade policy, by contrast, should be to get naked as quickly as possible. Which means there is no good reason to have trade negotiations at all. Everybody should simply stay at home and take their clothes off.

If some don’t, we might try to explain to them why they should. But we should do so already naked.

Jamie Whyte is director of research at the Institute of Economic Affairs

‘Forget trade deals. Everybody should stay at home and take their clothes off’