Who’s afraid of free trade?

Julian Jessop // 29 August 2017

Two reports published in the last few days have advocated the benefits of free trade. You might have expected them to be well received by the economics commentariat. In fact, many responses have been sceptical, with some downright hostile. What on earth has gone wrong?

 

The first paper, written by Prof Kevin Dowd and published by the IEA, suggested that the UK should commit to a policy of free trade as it leaves the EU, regardless of whether other countries reciprocate. The second, based on a study by ‘Economists for Free Trade’ whose lead author is Prof Patrick Minford, also argued that the UK could benefit from unilaterally lowering its trade barriers after Brexit. Given that a large majority of economists presumably favour free trade to some degree, the adverse reaction has been remarkable.

 

What’s more, many of the comments simply attacked the messenger, rather than the message. Some seem to think it acceptable to argue that any economist who supported Brexit should automatically be ‘no-platformed’. To pick just one example, 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. If this were a sensible test then surely we shouldn’t be paying any attention at all to those who predicted an imminent recession. That would knock out a great many Remain economists too.

 

To be fair, though, there have been more serious critiques of both reports. 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 underlying principles are as sound as any.

 

Elsewhere, it has been argued that Professor Dowd’s paper is wrong on two legal issues. The first is whether the default position under the principle of continuity in international treaty law means that the UK and EU could simply continue to trade on the same terms as before. The second is whether, if the UK maintained zero tariffs, the EU would be free to reciprocate without also offering the same terms to other WTO members under the ‘Most Favoured Nation’ rule.

 

For what its worth, my own view is that reciprocation could be allowed during a transitional period before the conclusion of a comprehensive free trade deal between the UK and EU. This is the so-called zero-for-zero option. 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.

 

This is where the criticism of the reports has been most disappointing. The thrust of the economic argument for free trade is that it prioritises the interests of consumers before those of producers, or at least producers that would not also benefit from cheaper imports. Prof Dowd illustrates this well with some classic quotations from Adam Smith and Robert Peel. Of course, there would be some losers from free trade among consumers as well as producers – but this would be true of almost any policy change. Provided the economy as a whole is better off, it should be possible to compensate the losers – if desired – and still come out ahead.

 

A couple more objections, while I’m at it. Some have argued that unilateral free trade is an especially bad idea when a country is already running a trade deficit. This is a very Trumpish point and, among other things, ignores the ability of the exchange rate to adjust. It isn’t even clear that the trade balance would deteriorate, as long as lower import prices offset any increase in import volumes. 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.

 

Admittedly, all this is still counterintuitive to many and even dismissed by some as ‘free market fundamentalism’. There’s clearly more work to be done. Perhaps one helpful way to think about the merits of free trade is to start with some simple examples. Presumably no-one thinks it is sensible to impose import tariffs on things that the UK doesn’t produce – such as coffee and oranges. Dropping the EU’s barriers here immediately after Brexit should be a no-brainer, especially given the benefit to developing countries.

 

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?

 

Finally, what about things that other countries can only produce more cheaply using large subsidies or some other undesirable advantage? This, admittedly, is more difficult. Some argue that it would then be sensible to protect domestic producers with subsidies of our own. But two wrongs don’t necessarily make a right. Why shouldn’t our consumers benefit if another government is daft enough to waste its own taxpayers’ money?

 

To be clear, I wouldn’t want to ignore the transitional costs associated with a move to genuinely free trade. If it were down to me I’d favour a phased approach. Indeed, both Prof Dowd and Prof Minford accept that multilateral trade deals may be optimal in many areas and should be pursued alongside unilateral free trade in others. (‘Unilateral’ here does not necessarily mean ‘universal’.) And in the case of the most egregious examples of dumping, I’d still want to retain the option to retaliate under WTO rules.

 

Nonetheless, free trade puts consumers first. It is disheartening that many commentators seem to prefer the alternative – which is naked protectionism.

 

This blog post appeared first on the IEA’s website.

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