Why we should cut tariffs, whether others follow or not

On the morning of 13th March the government confirmed that it intends to eliminate 87% of tariffs on goods imported into Britain, but only if the UK leaves the EU without a deal, and only for an initial 12 month period. This plan therefore raised just two cheers from me. However, as I write this, MPs seem set to rule out a ‘no deal’ Brexit. That would be a shame. Taking tariff cuts off the table would be another missed Brexit opportunity.

Critics of any form of unilateral tariff reduction usually focus on one or more of three concerns: the risk to jobs, the threat to ‘standards’, and the potential loss of leverage in future trade negotiations. I’ll tackle each of these in turn.

The first of these concerns is usually little more than naked protectionism. Many have claimed that UK manufacturing and agriculture would be ‘devastated’ by a flood of cheap foreign imports. As it happens, the government’s no-deal contingency plan would keep tariffs (and/or quotas) on the most sensitive goods, including finished vehicles, beef, lamb, pork and poultry, butter and some cheeses, raw cane sugar, and certain kinds of fish, ceramics and textiles. Car makers and farmers in particular have little to fear here.

But even if these sectors were not protected, it is important to look at the bigger picture and put consumers first. Lobby groups such as the CBI and NFU are pushing the argument that many UK businesses would be unable to compete unless they are propped up by tariffs. If true, this would be a pretty damning assessment of their own members. These groups also appear to assume that UK consumers don’t care about quality and will just buy whatever is cheapest. And they ignore the lessons of countries such as Singapore (manufacturing) and New Zealand (agriculture), which have lowered trade barriers unilaterally and whose domestic industries are now thriving.

There is a case for supporting activities that provide some wider public benefit, such as the positive impact of good farming practices on the environment, and for protecting industries from unfair competition that might affect the security of supply in the longer term (a reasonable justification for ‘anti-dumping’ duties). However, if a business would otherwise be uncompetitive, it is surely right to start by asking why.

What’s more, trade barriers can only protect jobs in some sectors at the expense of others, and almost always leave the economy as a whole worse off. The key point here is that trade is not a zero-sum game. Both parties benefit from the exchange, or else why would they agree to it?

Indeed, almost all economists accept that increased openness to trade (both exports and imports) is a ‘good thing’; it allows people to benefit from more specialisation and competition, from economies of scale, and the greater sharing of knowledge. Consumers, in particular, gain from lower prices and more choice. (For further reading I recommend Donald Boudreaux’s Free trade and how it enriches us, and the sections on Adam Smith and David Ricardo in Eamonn Butler’s An Introduction to Capitalism, both published by the IEA.)

Nonetheless, like practically any other worthwhile policy, free trade does come with a cost. The sceptics are right that any reduction in trade barriers, whether done unilaterally or multilaterally, is likely to cause job losses in those sectors where the UK is relatively uncompetitive (or, more accurately, lacks ‘comparative advantage’). However, what most sceptics are missing is that cutting tariffs will also create jobs in the other sectors and that this should more than offset these losses.

This process would work in a number of ways. For example, a lower import bill will leave consumers with more money to spend on other goods and services, including those produced at home. Domestic companies will also benefit from the lower cost of imported parts and goods that they themselves sell. What’s more, jobs are more likely to be sustainable in activities where the UK has a genuine edge, rather than relying on artificial barriers.

To be clear, any reduction in trade barriers will be painful for some (a point that has been acknowledged by even the most passionate advocates of unilateral free trade). The initial losses are likely to be concentrated among a relatively small number of firms and individuals, whereas the gains will be dispersed widely and more thinly across the rest of the population. However, we have the means to redistribute income and help people adjust, and the UK economy is pretty good at creating jobs to replace any that are lost.

Nor is tariff reduction a serious threat to standards. No-one, and certainly not me, is arguing for free trade in dangerous goods and unsafe foods. But it is important to understand that tariffs and standards are separate things with different purposes. Tariffs are not designed to keep potentially harmful products out of the country. That’s what regulations are for.  It is therefore entirely possible to lower tariffs without lowering standards.

Of course, we can have long debates about what is safe and what is not. My view is that any restrictions on individual choice have to be science-based and proportionate to the risk. (So I’d happily eat chlorine-washed chicken, provided it is properly cooked!) Unless there is compelling evidence of some hidden threat that might be unknown to the consumer, people should be free to make up their own minds.

For example, we should all know by now that smoking is harmful, and smokers already pay additional taxes to cover the social costs that their behaviour might impose on others. (In the jargon, they are already paying the ‘Pigovian tax’, and probably a lot more.) A complete ban on the sale of tobacco would therefore be unjustified paternalism.

On the other hand, people have a reasonable expectation that the government will help to protect them from being electrocuted by a faulty kettle or poisoned by a piece of poultry. My answer to the question ‘would you allow food to be sold that is unsafe, if someone wanted to buy it just because it was cheaper?’ is, of course, no. There may also be legitimate worries about animal welfare. If this means that a US-UK free trade deal has to be delayed, or initially limited to less sensitive areas, then so be it. (To borrow a phrase, ‘no deal is better than a bad deal’.)

Nonetheless, it is clearly wrong to argue that people should be prevented from buying goods from overseas based solely on as assumption that ‘cheaper’ means ‘more dangerous’. Another country may simply have a comparative advantage in making a particular product, even to the same standards as those in the UK. After all, the UK runs a large trade deficit in goods with the EU, despite regulatory alignment and the absence of tariffs.

Even if goods are cheaper because they are made to a lower (but still safe) standard, why should people not be free to make their own decisions when trading price against quality? It would be wonderful if we could all afford the finest, but the reality is that many can’t. It’s not obvious how poorer people in particular are being helped by import tariffs that raise prices and restrict choice.

The third and final concern is that unilaterally lowering tariffs might reduce our leverage in future trade negotiations. I think this is a weak argument for several reasons. As discussed earlier, we would be better off eliminating the tariffs on the goods we import, regardless of whether or not other countries reciprocate. Import tariffs are ultimately a tax on consumers and removing them is a clear win, regardless of what other countries do. In any event, most trade deals are more about non-tariff barriers than tariffs. Indeed, this is why countries that have lowered tariffs unilaterally still have free trade agreements too.

Some sceptics, while recognising the benefits of lowering tariffs, have made some more sophisticated points. In particular, it has been argued that, because the large majority of our imports (around 80%) are already tariff free, eliminating the remainder might only reduce average UK consumer prices by 1% or so. Thus, unilateral tariff reduction with the rest of the world might not be a big deal, and any benefit could easily be offset by an increase in trade barriers with the EU or a further fall in the pound.

In my view that’s far too pessimistic. For a start, even if we currently import good X with a zero tariff from country Y, we might be able to buy X more cheaply if tariffs were removed on imports from a more efficient producer, country Z.

Suppose, for example, that the tariff-free price of bananas is £100 from Africa and £95 from Latin America, but imports from the latter are subject to a tariff of £10. On this basis alone, we would presumably import 100% of our bananas tariff-free from Africa at a price between £100 and £105 (depending on how effectively African producers compete among themselves). But if the tariffs were eliminated, we could buy for £95 from Latin America instead, saving at least £5 (or 5%). Admittedly, that would remove what is in effect a transfer from UK consumers to African producers, but there are far more effective ways to deliver development aid than subsidising inefficient production.

Eliminating tariffs on imports from the rest of the world would also mean we did not have to impose them on imports from the EU (under the WTO’s MFN rules). Eliminating the need for checks for tariff purposes would contribute towards minimising border delays. And by mitigating these potential downsides of ‘no deal’, this should limit the downside for the currency too.

In summary, import tariffs are both unfair and inefficient. We have lots of ways to compensate losers, and can reduce tariffs without lowering standards. Yes, we might want to move gradually in some areas, continue to subsidise farmers in other ways, and retain the option of imposing ‘anti-dumping’ duties. But our ambition should be to eliminate the bulk of our remaining tariffs as soon as possible, deal or no deal.

I understand that we might want to move gradually in some areas, to continue to subsidise farmers in other ways, and to retain the option of imposing ‘anti-dumping’ duties. But our ambition should be to eliminate the bulk of our remaining tariffs as soon as possible – deal or no deal.

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