Tariff-free trading is the quickest route to economic prosperity. But can the UK persuade the EU that it’s in the interests of us both?
Boat Quay in Singapore: The city-state is the top country in the Trade Enabling Index (CC BY-SA 4.0)
Free trade is good for you. Nations that adopt it as the central principle of their international economic policy-making develop and prosper; they outperform nations that restrict imports and limit contact with the rest of the world. That is one of the plainest lessons of the almost two and a half centuries that have followed the publication in 1776 of Adam Smith’s Wealth of Nations, the book usually regarded as the beginning of modern economics and still unequalled as a critique of inward-looking mercantilism.
Such city states as Hong Kong and Singapore, which began as colonial free ports and retain free trade to this day, have incomes per head which are a multiple of their neighbours. At the other end of the spectrum, the two remaining self-styled Communist polities — North Korea and Cuba — pursue autarky, and are marginalised, backward and poor. Hong Kong and Singapore may be small and exceptional, but they are not unique. Crucially, their success has been an example to others, sometimes much larger and with huge geopolitical significance.
However unattractive the style of government in the United Arab Emirates may be in other ways, it cannot be overlooked that since independence from Britain in 1971 the UAE has been a startling economic success story. From the start the Maktoum family determined that Dubai (and specifically the Jebel Ali Port and Free Zone) should adopt free trade, and commercial policy for the UAE as a whole has also been relatively free and open. The Emirates too have incomes per head that are a multiple of their neighbours.
After the death of Chairman Mao in 1976 China’s political leaders rethought from scratch the management of their economy, which had been closed to the rest of the world for 30 years. At that time the international trade of Hong Kong, which with the New Territories had about the same size as the Outer Hebrides, was greater in value than that of mainland China, the world’s most populous country and the fourth largest in terms of land area. The creation of free-trade Special Economic Zones — mini-Hong Kongs in effect — was Deng Xiaoping’s pragmatic and understandable response.
Deng thereby inaugurated the most far-reaching strategy of unilateral trade liberalisation ever seen, so that China nowadays has low import tariffs by international standards. The value of its total trade (exports and imports of goods combined) is roughly the same as that of the United States at about $4,000 billion, and it is by far the largest exporter of goods in the world. According to data published by the International Monetary Fund, this trade opening — pursued voluntarily and on their own initiative by the Chinese authorities — has been associated with an almost twenty-fold increase in real incomes per head since 1980.
The message of China’s trade liberalisation, and of other trade liberalisations over the last 40 years (notably in Latin America, where Chile and Mexico have had major trade reforms), is of huge relevance to the Brexit debate. Not only is free trade good for you, but also — very logically — self-chosen action to open the home market to imports, to move closer to free trade, is beneficial. The ideal trade regime for all nations is to have no tariff or other barriers on imports whatsoever. To recall the phrase and the sentiment that determined last year’s Conservative leadership contest, free trade means free trade.
The point for the Brexit negotiations is simple and fundamental. No hard bargaining between the British government and the European Union on trade is necessary at all. The best policy is to have no tariff or non-tariff restrictions for imports from the EU, just as that is the best policy for imports from any country. Once the general election has given the Conservatives a large majority, the optimum approach would be for Theresa May to declare a policy of unilateral free trade and to move on. We just don’t care what restrictions the EU wants to impose on our exports to it. That would return Britain to the status of global free trade champion that it maintained from 1846 to 1932, when its living standards were among the highest in the world and well above those in the rest of Europe.
Historically, the Conservative Party has been ambiguous about free trade. It has always been the party of the aristocracy and the landed interest, and — while these might now be deemed mere relics — spokesmen for agricultural protectionism can still be found. But the pressure to abandon free trade in the early 20th century derived above all from the urge to make the British Empire more meaningful as a geopolitical entity. The turning-point in 1932 was not that Britain turned inwards against the world, but that its leaders regarded Imperial Preference (and later “Commonwealth Preferences”) as a better way of embracing the assortment of entities coloured pink in the atlas. May and her team are well-aware of the unilateral free trade option, but at least two objections are being voiced in circles close to policy-making. Perhaps surprisingly, the history remains important.
The first contends that we cannot be indifferent to the trade policy that applies in our European neighbours. It may well be that unilateral free trade is the best idea for us, assuming that we can do nothing to alter the EU’s Common External Tariff (CET) and various other forms of EU protectionism. But should we take that assumption as given? Should we not try to influence the EU’s openness to our exports by faking a protectionist attitude in the negotiations? Should we not encourage them to lower the CET tariffs or to remove them altogether by saying that, if they don’t, the UK could enforce tariffs — perhaps high tariffs — on imports from our former EU partners?
In other words, we are really free traders and free trade is our eventual goal. But we live in a wicked and benighted world, where the EU trade negotiators are nasty and selfish, and certainly more evil and ignorant than us. In view of their shortcomings, we must goad them into taking the right course of action, which — as ever — is being open and liberal in international economic relations. So, if Britain threatens tit for tat, the EU’s negotiators are more likely to follow the right course of action, and to have minimal trade barriers against us. Indeed, if we are belligerent enough, we may even secure the full free trade with our neighbours that we wanted in the first place.
The weaknesses of this approach are its blatant intellectual dishonesty, and the danger that protectionist negotiating positions are declared and then become entrenched. If you believe that unilateral free trade is the right policy and say so, and yet you threaten tariffs against a protectionist counterparty, your position is obviously inconsistent and unpersuasive. If you secretly believe that unilateral free trade is the right policy and publicly say that you don’t believe in it, and so threaten tariffs against a protectionist counterparty, you should not be surprised if the counterparty is obdurately protectionist.
These issues are not new. Sir Robert Peel, when announcing the repeal of the Corn Laws in the House of Commons in 1846, remarked that the government should not “resume the policy which . . . we have found most inconvenient, namely the haggling with foreign countries about reciprocal concessions, instead of taking that independent course which we believe to be conducive to our own interests . . . [L]et us trust that our example, with the proof of practical benefits we derive from it, will at no remote period insure the adoption of the principles on which we have acted . . . Let, therefore, our commerce be as free as our institutions. Let us proclaim commerce free, and nation after nation will follow our example.”
It has to be admitted that the early announcement of unilateral free trade might appear quixotic. There is no guarantee that the remaining 27 EU member states would respond with equal generosity and open-mindedness. The EU might retain the current tariff levels in the CET, including such monstrosities as the 74 per cent on milk and the 55 per cent on canned peaches. Would this not be unfair on some of our producers, including (needless to say) the farming industry?
The answer is to insist that the lessons of history and geography are the lessons of history and geography, and that free trade works. If the EU were to retain the CET in its entirety after Brexit as the UK adopts a free trade regime, the long-run losers would be member states of the increasingly protectionist EU. In the UK a case for transitional relief for particularly hard-hit sectors of the economy (including farming) might be pressed and the taxpayer might cough up to help them. But any such relief should be time-limited. If British farms cannot produce milk that is competitive at the world price, the dairy industry must close. Hard luck, but the UK no longer makes horse-drawn carriages and steam engines, and life goes on.
The second rebuttal of unilateral free trade is that it is too purist. The argument turns on the UK’s inability to negotiate trade deals on its own as long as it has been an EU member. Allegedly, we have been missing out. When free from EU constraints, and with our own representation once more at the World Trade Organisation, the UK should reach bilateral trade deals with the USA, China, Australia, Canada and so on. According to this school of thought, a multiplicity of special country-to-country deals is better than the UK’s once-for-all announcement that it has chosen free trade.
It is striking that the special-deal enthusiasts often cite the USA and the big Commonwealth countries as the UK’s most attractive associates, in the reasonable belief that strong links with them resonate well with the British public. The history, and the language and cultural ties, still matter. However, just as Imperial Preference broke with the UK’s tradition of free trade in the 1930s, so the special-dealers risk betraying free trade in the 21st century. Properly understood, a free-trading nation has zero tariffs for all products from all countries, and by definition does not discriminate between trade partners. So it has no need for any special deals. All too frequently, real-world “free trade deals” are not that at all, but specify preferential rates and arrangements of some sort, sometimes introduced to placate lobbying by a powerful interest group.
Of course, the Brexit negotiations will encompass more than trade. Also contentious will be the direct fiscal cost of exit and the status of EU residents in the UK (as well as of UK residents in the EU). But trade is central and overriding, despite the EU’s attempt to prioritise the amounts the UK supposedly owes the EU. It is possible that differences over the cost of exit are irreconcilable, with numbers such as €100 billion likely to be rejected out of hand by the British government. If so, the dispute will surely be sent to arbitration and trade matters must then come to the fore.
The early signs from the EU side are dispiriting, and could even be described as small-minded and vindictive. Particularly unlovely was the remark by the Austrian Chancellor, Christian Kern, in February that the negotiations “must ensure Britain is made worse-off when it leaves the trading bloc” since any other outcome would be “capitulation”. The EU has no grounds for protesting about the UK becoming like most of the world’s countries. If the European Commission and other EU institutions find nothing objectionable about the roughly 160 of the world’s nations that are not EU members, they should find nothing objectionable when the UK increases that number to roughly 161.
When the Brexit negotiations start in earnest later this summer, Britain must strike the right note. Yes, bad, dirty money does matter, and over-the-top demands from Brussels must be resisted. But one way of setting the pace, and turning the tables on mean-spirited bureaucrats, would be to make clear that a drive for global free trade is Britain’s eventual aim. It would be good if the EU could join us, but if not (and if they must keep 74 per cent tariffs on milk and the 55 per cent on canned peaches) that is their misfortune. By pressing the ideal of global free trade in the Brexit negotiations, the UK can take the high ground and offer an inspiring example to other countries. The free trade position must not be compromised by tit-for-tat haggling or special bilateral deals.
The hope must be that Britain and the EU achieve an amicable break-up. But unnecessary tension and misdirected bitterness are possible, and Jean-Claude Juncker’s bad start is unfortunate. The EU must understand that the UK does have a fall-back position of no deal at all. We can walk away, and allow the Bretton Woods institutions (and the North Atlantic Treaty Organisation) to set the context for the EU-UK relationship from April 2019. An important virtue of the unilateral free trade option is that it fits hand in glove with the “no deal is better than a bad deal” principle. The EU should welcome imports from the UK when we restore full political independence. All being well, trade volumes will not just stay as they are, but grow strongly. A friendly departure settlement would of course be best. But American and Chinese companies export on a massive scale into the European single market from outside the EU without a special deal. Surely British companies can do the same when the UK is also outside the EU, deal or no deal.