Don’t fall for the myths – free trade enriches the world

Max Rangeley
Follow Max
US Open
Any two economies can benefit from trade even if one economy is better at everything that the other (Source: Getty)

Free trade has arguably created more prosperity than any other concept within economics.

The wealthiest countries in the world are, generally, the ones which have the freest trade, often irrespective of their political inclinations.

Norway tends to the left, Singapore and Hong Kong to the right, while Switzerland is more libertarian – yet they are the wealthiest countries in the world, and have become so to a large extent through trade.

Read more: City of London experts unveil a blueprint for Brexit

This has also been a historical trend, from the rise of ancient Athens, to the Song Dynasty in China, to Britain’s prominence as a trading nation. Yet there has been an unfortunate bias against free trade growing in recent years, so let’s dispel some myths.

Myth 1: Buy local to protect the environment

When you purchase a cut of New Zealand lamb from your local supermarket, it has only 40 per cent of the carbon footprint of the same cut of British lamb, even though it has come from the other side of the world. This is because the transportation phase counts for only five per cent of the total carbon emissions, and therefore the more carbon-efficient farming in New Zealand far outweighs any transportation cost.

Myth 2: Protectionism saves jobs

In 2009, President Barack Obama passed an import duty “protecting” American tyre manufacturers from Chinese competition by increasing tariffs. The Peterson Institute did a study and found that a maximum of 1,200 jobs were “saved” by these tariffs, with a total cost to consumers of $1.1bn per year, or roughly $900,000 per job saved. The average salary in the US tyre industry is $40,000 per year.

In addition, the study found that 3,731 jobs were lost elsewhere in the economy – a net loss of 2,531 jobs. Retaliation by China in the form of anti-dumping duties on American chicken produce cost the American chicken industry a further $1bn per year.

That makes each job in the tyre industry “saved” more expensive than buying a brand new Lamborghini for each tyre worker along with their spouses and children to compensate them.

Myth 3: Countries don’t need to trade with partners that are less technologically advanced

The Nobel Prize-winning economist Paul Samuelson was once asked for a theory in the social sciences which was both true and non-trivial. The theory he gave was Ricardo’s theory of comparative advantage. Ricardo showed that, even if one country is more efficient at all products than another country, trade still makes sense and will create prosperity for both parties, because each economy can specialise more than they could before.

In reality, any two economies can benefit from trade even if one economy is better at everything that the other economy.

Myth 4: Trade is about selling more goods than the “rival” economy

Trade is about maximising well-being for the citizens in all economies. If you can buy a car from Japan or wine from Australia, you are better off. Trade is not some test of national virility to see who can export the most products, but rather a system whereby people have access to the best quality goods from around the world. If Japan did not allow any imports, it would still be worth allowing our citizens to buy Japanese products – Subarus and Sony playstations make us better off, irrespective of whether we can sell our products to Japan.

Myth 5: Free trade means lower quality products

Free trade has brought about innovation in almost all sectors of the economy. The fact that smartphone manufacturers must compete with others from all over the world means that prices fall annually as well as quality increasing. A study by the University of Oslo last year found that free trade brought substantial increases in innovation around the world, benefitting all of us.

On Monday, the Institute for Free Trade is hosting the Global Trade Summit here in London. We will be discussing how to tackle these myths, and promote free trade across the world. Perhaps most importantly, with trade generally comes peace, and long periods of peace have mostly brought about increasing free trade.

Let us hope Britain can set an example to the world, and to posterity, in how we trade with all nations. Free trade – as much of it as possible, and preferably unilateral – should be the guiding principle of British foreign policy, and not just because it helps our businesses sell more goods to other countries.

Read more: Looking forward to a new era of UK-Canada free trade

City A.M.'s opinion pages are a place for thought-provoking views and debate. These views are not necessarily shared by City A.M.

Related articles