It really could happen. Republican candidate Donald Trump might win the presidency of the United States on an overtly protectionist, anti-trade ticket. In a recent speech he slammed globalisation, and threatened to tear up the North American Free Trade Agreement. In the absence of the leadership of the United States, who will stand for free trade?
The answer should be: a newly independent Britain. Britain is a free-trading nation, and the new secretary of state for international trade Liam Fox MP gets this. He, like other prominent Leave campaigners, always argued that the EU constrained Britain’s free trade instincts.
The Common External Tariff (CET) is the EU’s protectionist wall – imposing tariffs on goods imported from outside. That and a host of EU non-tariff barriers raise agricultural and manufacturing prices by around 20 per cent within the customs union, to the detriment of our consumers. The EU’s record in signing major trade deals is likewise poor, not least because they are often used to attempt to export regulation and other non-economic issues surrounding human rights, while being delayed by the competing interests of 28 different member states.
But if we are to abolish the CET and expand free trade, the key thing our new secretary of state must remember is that it’s domestic consumers who suffer from protectionism. In the coming years, he’ll be inundated with UK producers and companies seeking exemptions or protection for their own industries. There will be calls for “British first” procurement rules, quantitative restrictions, non-tariff barriers through unnecessary standards and regulation, and much more. These will often get public support. After all, it’s always easier to identify those who may suffer if protection is removed or benefit from its implementation. This is why the EU still has its Common Agricultural Policy, despite a wide consensus that it is economic folly.
If the key insight that it’s consumers who suffer from protection is remembered, ideally we would embrace the only morally defensible trade policy – unilateral free trade. Yes, that’s right: the UK should remove all tariff and other trade barriers, allowing British consumers to import goods from all over the world without constraint. The consumption benefits of this are obvious. In war, we try to blockade economies so they can’t buy others’ goods. But tariffs and other barriers, in effect, act to blockade ourselves. Their removal means consumers can buy what they want wherever it is produced most cheaply – delivering lower prices in the shops.
Of course, some existing producers will suffer if protection is removed (but remember, 85-90 per cent of the UK’s economy is in non-protected sectors). The economy as a whole, however, will benefit. If an economy is trading freely, its resources are making the most of the opportunities prescribed to them by the pattern of prices in the rest of the world, and this competition means the economy as a whole will be more productive.
Paradoxically, this policy position would put the UK in a powerful position vis-à-vis the EU. EU exporters selling into the UK’s market will now be facing competition from around the world, and UK prices will be lower – hurting their profit margins. The German car industry and others will be desperate to avoid this scenario, and will lobby the German government and hence the EU to come to some sort of deal to maintain current arrangements. This would be sub-optimal, but may be politically sensible as a transitional arrangement.
What if Theresa May’s government is simply not bold enough to adopt unilateral free trade? The priority then should be to move away from the sorts of “managed trade” deals that have come to dominate in recent years. Bilateral trade deals should be with countries large enough to affect world prices, and should genuinely be about removing barriers and mutual equivalence of regulation, rather than seeking to always harmonise everything and influence other countries’ internal politics.
Yesterday, May suggested a ridiculous “national interest” test on foreign takeovers in the UK. We must hope that Fox can convince the Prime Minister that, when it comes to trade, exchange happens between individuals and not nations. Nativism and protectionism are damaging to prosperity. The UK now has an opportunity on trade to lead, through example, away from the damaging direction the US is moving in.