The benefits of a free-trade Brexit

‘Theory says that unilateral moves to trade liberalisation ought to benefit countries going down that path. Practice shows that the theory works — free trade is good for the nation that adopts it’

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A sugar beet field: While unilateral free trade would benefit the UK as a whole, many in agriculture, particularly sugarbeet farmers, would suffer (Gilles San Martin CC BY-SA 2.0)

Brexit meant Brexit, but no one was entirely sure what Brexit meant. It now seems that no deal may mean no deal, but a similar uncertainty besets the meaning of no deal. Of course, no deal means that we do not pay £40 billion for “two-thirds of diddly squat”, as Boris Johnson has put the matter. It also means that Parliament recovers sovereignty and has a genuine chance of recovering its ability to pass new legislation in every area of national life, regardless of the European Commission. But what about trade policy, the subject which was central to the debate when we joined the then “Common Market” in 1973?

The default position is that, under World Trade Organisation rules, a country leaving an international trading arrangement replicates the existing tariffs and quotas applying within that arrangement. Inside the European Union the UK has free trade in all products with other members; outside the EU it adopts the EU’s common external tariff — as it is at present — and the CET applies to our trade with the remaining 27 EU nations. The CET includes some very high tariffs,  notably of up to 36 per cent on dairy products. So suppose the government is passive and the default position becomes reality. Then no deal implies that there would be a tariff rate of perhaps 36 per cent on both dairy exports from the UK to the EU 27 and dairy imports to the UK from the EU 27. Any fool can see that — in these circumstances — no deal would be a backward-looking and suboptimal for the UK.

It follows that, if a trade deal with our European neighbours cannot be reached, the government has to form a view on the right tariff levels and quota restrictions for our country after Brexit. In an article in the June 2017 issue of Standpoint I argued that the correct response to this challenge was to abolish tariffs and quotas in their entirety, and to pursue unilateral free trade. The clear lessons of textbook theory and real-world experience are two-fold. Theory says that unilateral moves to trade liberalisation ought to benefit countries that go down that path. Practice shows that the theory works and that free trade is good for the nation that adopts it. (Compare Singapore and Hong Kong — both free traders for many decades — with Cuba and North Korea, which have been semi-autarkic, again for decades. Think of the explosive growth of trade and output which followed China’s self-chosen elimination of quotas and slashing of tariffs under Deng Xiaoping.)

At this point politics intrude. While the UK as a whole would gain from unilaterally-introduced free trade, a variety of particular interests — particularly in agriculture — would not. The most articulate of these include farmers who grow sugar beet. The European price of sugar reflects the EU’s protectionist attitudes and has typically been three times as high as the world price. If the UK pursued unilateral free trade, sugar beet would cease to be grown in the UK. According to lobbying from the industry, 3,000 jobs would go. Needless to say, many other interest groups would not be viable under a free-trade Brexit and they tell the press and their MPs of their anger.

Theresa May said in November 2017 that Britain should become a “global free trade champion”. In reality her government has behaved as if the EU’s trade regime were fine for the UK, and has — for example — tried to carve out a proportion of such insults to free trade as “tariff-rate quotas”. These quotas limit the quantity of imports, mostly food imports, allowed into the UK and are an important reason for the difference between the European and world prices. By continuing TRQs after Brexit, UK food manufacturers would still have to pay the European price for key inputs such as sugar and grain. Politicians and civil servants seem incapable of understanding that UK-based food manufacturers would be highly competitive in world markets if they did not have to pay the often preposterously high European prices for these inputs. They just cannot see that the 3,000 job losses in beet sugar would be accompanied by job creation, probably into the tens of thousands, in food manufacturing.

I am not disputing that a case can be made for state compensation for the interest groups most vulnerable to the upheaval of full free trade. But any compensation must be time-limited, so that the benign and positive resource re-allocation (such as that from high-cost sugar beet producers to newly-competitive food manufacturing) after a free-trade Brexit does indeed occur. Politicians must be wary of lobbying for economic activities which are inefficient by world standards. The halt to productivity growth across the developed world since the Great Recession is almost certainly attributable — at least in part — to the ossification of industrial structure consequent on the widespread drift towards increasing protectionism. The EU has participated in that drift, even if the United States under Donald Trump is for now the more egregious offender against free and open international trade.

Sceptics may mock unilateral free trade as impractical in the UK, simply because lobbying and politics always dominate over idealism and economics. Free traders may be naive and wrong to believe that a new Prime Minister will recognise the huge benefits that their favoured policy would confer on the UK. But at least under a new Prime Minister there might be hope that a no-deal Brexit would lead to a radical and exciting change in our international trade relations.