Free Trade would make the UK Better Off by 4% of GDP
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The country is currently in a flap about securing a trade deal with the EU. Why? Do we really need a trade deal with anyone, or are we just asking for one because we think they are necessary?
There is no doubt that the worst bargaining position is held by the most fearful person. In this case that is Germany, sorry, I mean the UK (slip of the tongue). A fear-based approach to bargaining needs to be seen for what it is, desperate and not resulting in anything good.
In this article I will argue that as a small country, the U.K. doesn’t need to strike trade deals with anyone, in fact they are more likely to be counterproductive than beneficial to the country. Instead we should be looking towards global free trade.
I will say from the outset, that the free trade approach is good for the economy because it acts to make the people richer, rather than the protectionist trade deals which make vested interests richer. Given the movement of the vote against vested interests in the Brexit referendum, the next government might just have the balls necessary to implement a system where we sign no trade deals with anyone, accepting the world price for what we buy and sell, and continuing to sell into global markets, many of whom we don’t currently have a trade deal with.
Why Bother with a Trade Deal?
We only have one trade deal at the moment, which is with the EU, and that one is damaging to our economy. Firstly it is worth stating the basis of free trade and why it suits a small nation like the UK. It is about accepting the things we can control and the things we cannot, in economic terms.
As a small global player, amounting to less than 3% of global GDP, the UK is too small to influence the price of products and services, we just don’t produce or consume enough to set prices, unless those things are unique to us in which case we can charge as much as others are prepared to pay for them (Formula 1 for example).
The world price is set by aggregate producers in the rest of the world market who produce similar quality products and services, and by how efficiently they can produce things to the required standard and deliver them to market.
Large countries like China selling to large unions like the EU is a different matter, concern about dumping goods into a market distorting prices is a concern, but for a small player like the UK, it is not.
UK pays World Price
As a small nation we do not set the world price, but we can control the price that we pay above world prices by choosing to not impose any additional tariffs on our population. Reducing the cost of living is as good as getting a pay rise, making the people better off (demand from individuals is the basis of any economy, lest we forget), and encouraging them to spend more. I know this might come across as a strange concept; in the UK we seem to be obsessed with the rising cost of living (principally through incessantly rising house prices), and how good we think it is for us. This is another example of how subsidising industries – in this case the banking sector which creates our money – diverts money from the general public, the users of the money supply, towards business. Sure, some individuals in the economy work for these big banks as employees, but the majority do not, but are ‘taxed’ for using the money supply anyway, or foot the bill when the banks are bailed out after going bust. But this is another story, for another time.
Lower Costs = Pay Rise
If we abolish tariffs on goods coming into the UK, and our consumers pay less for food, manufactured goods, energy etc. this is the same as giving them all a pay rise. Sure, the government doesn’t get the excise duty, so it amounts to a tax break worth a few percent of GDP, and those companies producing goods in the country get less for their products as they must compete with the world price. What do they do? They either up their game, specialising and encouraging consumers to pay a premium for a better, higher tech product, or their business folds. If they cannot demonstrate they can cut it in the global stakes, they will suffer.
Who are the biggest manufacturing businesses in the world? Car manufacturers. What was their position in the Brexit vote? Remain. Why would they throw away a customs union tariff which means they can charge more for their cars than they otherwise might? Car manufacturers are highly successful at what they do, but they also get to charge a premium because of the customs union tariffs imposed on imports. This money comes from the public into the governments’ and business coffers when they buy these ‘overpriced’ goods. When you hear anyone espousing the benefits of something, ask yourself whether it benefits them, or whether it benefits you.
Now imagine the ‘nightmare’ scenario where the EU wants to charge tariffs on the UK goods being sold into the EU single market, now that we are outside the EU. Say they really want to punish us for our impertinence. They might decide that unless we sign up to their deals of free movement of people, we cannot sign up to the tariff free zone. We don’t want free movement of people, we want to control our borders. The EU single market with its customs tariffs on external goods, raises all prices. Everyone in the EU pays more. The only situation where you benefit is if you sell more to others in the customs union than they sell to you. In the case of the UK, we have a trade deficit to the EU, especially Germany with its great cars. So everyone in the EU is paying artificially high prices, and the countries which sell the most (Germany) get the most of the benefit of those higher prices. The countries with a trade deficit are hurt, and the country with the largest trade deficit is hurt the most.
So in a post EU Britain, we might choose to accept the standard tariffs charged on cars to the EU, we would sell our Jaguars and Land Rovers (JLR) to the EU, and because of the EU tariffs, their consumers would pay more for our goods than other countries which have no trade tariffs. This has the effect of diverting goods away from the EU market towards other parts of the global market who choose not to impose tariffs. The point is, tariffs hurt you, not anyone else.
These previously protected industries such as car manufacturing in the UK, are now required to pay their way in the world, to accept the world price. They will still make their basic profits as always, as long as they can sell their products to the world. Premium brands like Land Rover and Jaguar will be marketed and sold globally at the world price, plus a little premium for being a British brand. Crucially, because JLR employees’ cost of living has fallen due to the reduced cost of living across the board from being outside the customs union, employers can afford to pay them less, reducing their costs making them more competitive. This is all part of reducing the state burden on life, business and economy.
Just as a tariff can cause rising prices, when a country abstains from tariffs, the reverse happens, prices fall. If the Germans want to charge us a tariff on their cars coming to the UK, they are more than capable of doing that, but under the free trade model, we wouldn’t impose tariffs on Mercedes-Benz or BMW or VW, we would accept their prices, with or without tariffs, and let our consumers choose to buy their cars or not. What is likely to happen in this situation is one where the price of cars in the UK actually falls rather than rises, because the Germans are playing in the global game and they have the Japanese, Koreans and Americans to deal with. In the event that this whole lot ganged together and decided to charge more for their cars, which they are more than entitled to do, they just wouldn’t sell as many. World prices darling. Someone somewhere in the world would get all of the business. This is how market price-discovery works.
Protectionism has No Place in 21st Century Britain
Protectionism is a private members club which only works when lots of people join. (The EU knows the truth about trade deals, that we don’t need one). They are damaging for individual economies. No single economy would choose to charge a tariff on imported goods, unless its own businesses were highly uncompetitive and individuals wanted to sell into its market. But why they wouldn’t go elsewhere is beyond me.
In the 1970s if you wanted to tap into a lot of wealthy consumers you probably wanted to go to Europe, but world has changed since then, and plenty of the world’s billionaires live elsewhere. In a customs union, the most productive country in terms of trade surplus will win, and all others will lose.
Patrick Minford, Professor of Applied Economics at the University of Cardiff has done some modelling and he considers the following:
Detailed model calculations (Minford et al, 2015) show we would receive a welfare gain of 4% of GDP, with consumer prices falling 8% and our competitive services sector expanding to take the place of diminished manufacturing output. The calculations assume agriculture, already a tiny 1% of GDP, will be supported by direct grants from the Treasury (’deficiency payments’) to remain at about the same size.
This effect just doesn’t work with cars, but with any manufactured goods, and food, and beverages. Anything has a world price, and will be sold at the world price plus a little premium payment where applicable. If you’re competitive, you sell your products, if you’re not, you don’t.
Time to Up your Game
Under the free trade model, countries like the UK are required to up their game, moving away from unskilled activities towards more skilled activities, the areas best suited to the skills and experience of the population. The best example of this is Apple computing, which designs its iPhones and iMacs in Cupertino, CA, but has them manufactured in China. The Chinese get paid per unit, and they get a lot less than Apple get per unit. Manufacturing is part of the process, but not the most lucrative. Or UK firm Dyson which manufactures in Malaysia, but designs in Malmesbury Wiltshire. In a global free trade situation, the protectionism is gone, and we would be forced to specialise and to make our input more valuable, while businesses which no longer keep up with the times will go bust.
This is the free-market, and I am well aware that the concept in anathema to a lot of the world, so mollycoddled have we become, especially through the actions of central banks like the Bank of England and the Federal Reserve. In the real world, you have to be able to pay your way, or you get shut down and someone else gets the job. Wherever you put in a subsidy, you distort the market, and divert money from consumers to business and government. Take that subsidy away and you get the best prices for the people and you encourage efficiency, creativity, innovation; survival of the fittest.
The UK has the skills, experience and expertise to thrive in a free market zero tariff economy. We just need to walk away without fear and forge new open relationships with the rest of the world, a world where the most deserving get our business.
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