Silver linings
Lop-sided trade deal with the US could be a good thing
As I have repeatedly argued, trade deals are not an essential prerequisite for a successful trading relationship, as evidenced by the fact that despite there being no US-UK trading agreement, the US is our largest single export market. Nevertheless, they can bring some advantages and, as we may be about to lose some or all of the benefits of our current trading arrangements with the EU, the UK Government is keenly investigating the possibility of securing trade agreements with other countries. Far and away the most important of these is a possible trade deal with the US. The Trump administration has recently made some encouraging noises about the prospects.
Yet critics have suggested that even if we were able to secure a deal with the US, it would not amount to what it is cracked up to be. They point out that not only is the US economy approximately seven times the size of the UK’S, but because of our precarious economic and geopolitical position after Brexit, we will be a desperate supplicant, whereas the US will regard a trade deal with us as a “nice to have” rather than a “must have”. Accordingly, there will be a massive imbalance in negotiating power and we will be lumbered with a very bad deal.
This argument is misconceived. For a start, the US has concluded several trade agreements with countries whose economies are a good deal smaller than the UK’S. These include Canada, Australia and many more. Yet it seems pretty clear that they have benefited from their trading arrangements with the US.
But there is a more important issue at play here. To listen to most members of the commentariat, as well as most politicians, you would get the impression that trade negotiations are all about trying to gain maximum “access” to the other party’s market, while conceding as little access as possible to your market, in order to “protect” domestic producers. So, having to open up your market to imports from the other party is to be viewed as some sort of negotiating defeat or, at the very least, as a concession that you have had to grant in order to gain access to their market.
This mindset clearly sees the gains from trade as accruing largely or entirely to producers. Yet this is completely against the whole thrust of classical economic theory. The end of economic activity is, after all, consumption, not production. Equally, exports are not, in themselves, what we should be trying to secure. Rather, they are the price that we have to pay for imports.
If you took the “productionist” view you would regard the policy known as unilateral free trade (UFT) as absolutely bonkers. Under this policy, countries adopt tariff-free trade of their own volition, thereby willingly opening up their markets to imports from abroad without simultaneously securing access to overseas markets. Yet this is the policy that has been adopted by a number of countries, most notably by Britain in the 19th century after the abolition of the Corn Laws in 1846. More recently, Australia and New Zealand have unilaterally reduced tariffs across a broad swathe of goods without demanding (or securing) reciprocal treatment from other countries. They have seemed to do pretty well as a result. Meanwhile, Hong Kong and Singapore have thrived under a policy of zero tariffs on virtually all imports.
I don’t want to give you the impression that I think UFT is the first-best policy for Britain in today’s circumstances. The first-best policy is one that secures trade agreements with as many of our trading partners as possible. But the gains to our exporters from these agreements are typically exaggerated, while the benefits of a policy of UFT are widely underestimated. The reason is that a huge proportion of the gains from trade occur through being able to secure imports at a lower price. This both displaces more expensive imports and puts competitive pressure on domestic producers to increase their productivity or be forced to move into other sectors. (Of course, in the
‘Cheaper imports from America are likely to … keep down the price of imports from the EU’
short-term this normally causes disruption and some sectors may require government help to adjust).
So the supposedly disastrous, “lopsided” trade deal that many people fear the US will effectively impose on us could end up being a jolly good thing, and not that much worse than the best sort of trade deal we could achieve. The most important thing is to secure cheap US imports.
This is particularly true in current circumstances. If we leave the EU without a trade deal then we will be imposing tariffs on our imports from the EU, presumably at the rates laid down by the Government in March. How these arrangements work out and with what advantage to ourselves depends to some extent on what Continental producers decide to do when faced with these tariffs. Will they pass them on fully to UK consumers, or will they absorb them in reduced profit margins? It is in our interest that as far as possible they do the latter.
This result would be greatly encouraged by the flow of cheap imports from America. If, in the face of these cheaper imports, Continental producers tried to pass on the full effect of the UK’S new tariffs they would risk losing market share considerably. Accordingly, cheaper imports from America are likely to have the added benefit of keeping down the price of imports from the EU, as well as from the rest of the world.
Of course our trade negotiators should seek to get reciprocity from the US. But they shouldn’t be playing hardball to the extent of jeopardising the signing of an agreement. Like all trade negotiators, ours have to bear in mind that much of the benefit of tariff-free trade flows to consumers in the form of cheaper imports. Precisely what they fear as the problem happens to constitute a large part of the solution.