Tag: trade barriers

Free trade – whatever the cost?

Free trade and a hard Brexit are all but synonymous. There’s an obsessive quality about free traders, men on a mission, who feel their time has come: seize the moment, lest it slip away.

Daniel Hannan and Boris Johnson recently helped launch the Institute of Free Trade, arguably duplicating the work of the long-established Institute of Economic Affairs. I’ve always had a sense of vast lacunae between argument and reality among free traders, and I turned to an article on the IEA website, by its chief economist, Julian Jessop, to check out whether this judgement was justified. For the full article see:  https://iea.org.uk/whos-afraid-of-free-trade/

Jessop expresses puzzlement as to why ‘the economics commentariat’ (i.e. most economists) had given a ‘sceptical, with some downright hostile’ response to two papers advocating a policy a free trade once the UK leaves the EU, by Professors Kevin Dowd and Patrick Minford.

It may be unfair to quote passages and not reproduce the whole article, but to my mind they do speak for themselves.

‘… it has been suggested that Prof Minford’s analysis shouldn’t be taken too seriously because his forecasts of the economic and market impacts of the vote itself were inaccurate. As it happens I don’t know what Prof Minford was forecasting in 2016. But nor, frankly, do I care….’

‘Professor Minford’s current and past work in this area has been challenged for using what some regard as a simplistic and out-dated model of world trade. But the ‘gravity models’ favoured by many of his critics also have their flaws. Even if Professor Minford’s numbers are only as good as his models (which is always the case) …’

The phrase, ‘the underlying principles are as sound as any’, is key: there is a millenarianist belief in free trade as a universal panacea, the UK’s adoption of which will open the eyes of the rest of the world, as Britain did once before, in the early 19th century. ‘Gravity models’ refers to the long-established and incontrovertible pattern of a much heavier weighting toward trade with one’s neighbours, than with more distant countries.

Nonetheless, whatever the correct interpretation here, these legal points do not weaken the more important economic argument that the UK would be better off lowering its own trade barriers regardless of how the rest of the EU responds.

Free trade it seems works because it works, regardless of circumstance. In what sense better off – who would be better off?

‘… of course, there would be some losers from free trade among consumers as well as producers …

‘….there would be some losers..’ The reality is that the disruption would be extraordinary.

Others have suggested that trade can never be fully ‘free’, because of non-tariff barriers. But this is tedious semantics. Even if unilateral free trade only results in freer trade, relative to the status quo, that would be an improvement.

‘…tedious semantics’? There’s an impatience here, a touch of the Gadarene swine.

What then about things that we do produce ourselves but where other countries have a genuine comparative advantage? Why should we subsidise domestic producers if consumers can buy better or cheaper products elsewhere?

A few suggestions as to why… Easily disrupted supply chains, sourcing expensively at long distance, security implications, quite apart from the disruption to urban and rural landscapes as industries close and new ones – we would hope – spring up elsewhere. But in the chaos, and the economic disruption, what certainty is there that new industries, competitive on the world stage, would rise up?

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Read the whole article: you may find you’re on his side, not mine.

China shock

A digression – an important digression – into trade policy. Maybe a little heavy-going, but important!

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Apropos my comments in my last post on de-industrialisation, there’s an interesting article in the current (July) edition of Prospect, by the FT’s economics leader writer, Martin Sandhu.

Has the cause of growing inequality in the rich world since circa 1980 been caused by globalisation or technological change? In Sandhu’s words, by the late 1990s ‘… the economics profession settled on the consensus that technology more than trade was to blame. Then China joined the World Trade Organisation.’

He quotes Autor, Dorn and Hanson’s paper, ‘China Shock’, and highlights their conclusion that ‘Chinese competition had localised but substantial negative and long-lasting effects on the places particularly exposed to it’. ‘On one estimate more than half of [US] factory job losses can be attributed to the China effect.’

’… the imbalanced effect of trade liberalisation can only be corrected if the losers are compensated out of the overall gain – but more redistribution and greater public goods are not on the cards in Trump’s deck.’

Of course technology is also a key factor, so too the shift of power away from labour to capital – not least, the decline of trade unions.  Benefits have also been hit hard – even more in the USA than the UK.

‘It is no surprise that that people feeling powerless and alone in the face of their demotion yearn to regain control – to ‘take their country back’. That is what Trump promises them.’

So too the UK. ‘The same dream of regaining control …fuels the growth of socially-conservative nativist right-wing parties in Britain, France, Germany, Scandinavia and central Europe.’ Some of the same grievances have been picked up by Bernie Sanders as well as Trump. (We have nothing directly comparable in the UK.)

But whereas Trump talks of putting up trade barriers the Brexit message has been all about lowering barriers with the rest of the world , ‘to escape the walls of Fortress Europe’ – a rigorous free trade message. (Both the USA and UK insurgencies are of course agreed on immigration.)

Also bear in mind that economic theory ‘predicts that the effect of low-skilled immigration is the same as freer trade with countries that have a lot of low-skilled labour’. Put another way, freer trade (especially negotiated from a position of lesser rather than greater advantage post-Brexit) will hit hardest those areas already suffering.

(Some will course want to rubbish economic theory. That’s the mood of the moment.)

The impact of Chinese imports on British industry, and the resultant job losses, has been far far greater than the impact of immigration. And yet it’s immigration on which the Leave campaign has focused.

And the impact of free trade? Now that we’re escaping from an EU that’s perceived to be the over-regulated and slow-moving ?

‘…Brexit will not lead to a bonfire of the regulations, but a redoubled effort to harmonise rules – that’s what trade openness increasingly means.’

There’s an obvious and striking irony here – we put behind us the EU and harmonisation, and negotiations over TTIP (the Transatlantic Trade and Investment Partnership), and we find that we’re faced with just the same issues when we seek to negotiate free trade deals around the world. But without the clout the EU gives us.

More than ever it’s apparent that immigration for the Leave campaign has been a target of convenience. The issues we face as a country with regard to our future prosperity are of a very different order. Which is not to say that we shouldn’t pay heed to the specific impacts of immigration, but our future lies in facing up to the global context in which we operate, and in which we will be, post-Brexit, less equipped to operate.

And our response as a country to those who feel excluded and resentful will involve strategies which simply aren’t part of the Leave agenda. That’s the absurdity of the situation in which we find ourselves.