The UK government promotes international trade under the banner ‘Exporting is GREAT’. This is laudable, but the economic benefits of free trade come mainly from what countries import, rather than from what they sell overseas.
This is the main message from a paper I wrote recently for the Institute of Economic Affairs. Of course, it is not always an easy argument to make. If exports help to support local businesses and create jobs, it seems logical to assume that imports must do the opposite. It is therefore often taken for granted that exports are ‘good’, that imports are ‘bad’, and that a ‘flood of cheap foreign imports’ would be even worse.
My paper therefore refreshes the arguments for free trade in the light of some recent developments. One is the controversy over new trade deals which might allow agricultural products to be imported tariff-free into the UK from countries such as Australia and New Zealand. This has led to more-or-less explicitly protectionist demands for relatively inefficient UK farmers to be shielded from ‘unfair’ foreign competition.
Another is the impact of Brexit on UK trade with the EU and the rest of the world. The UK’s large deficit in trade in goods with the EU is still seen by many as a ‘cost’ of EU membership. Correspondingly, any reduction in this deficit is seen as a ‘benefit’ of Brexit, and as an opportunity to ‘buy British’ instead. This narrative has some protectionist thread too.
The fallout from the Covid pandemic and growing concerns about environmental harms have also encouraged calls for action to reduce the UK’s perceived dependency on global supply chains and replace them with domestic production. Again, these concerns are often misplaced.
For a start, importing goods from countries that can produce them more efficiently can actually be better for the planet than ‘buying local’. What’s more, the pandemic has illustrated some of the benefits of globalisation: imagine if every country had tried to develop and produce its own vaccine.
A consistent theme here is that the purpose of economic activity is – or should be – to improve wellbeing by providing the goods and services that people want at the best possible combination of quality and price. It is not about supporting particular businesses or protecting particular jobs. This means that the interests of consumers should be paramount.
In this sense, exports could almost be regarded as a ‘bad’ thing. Goods and services that are exported are goods and services that local consumers are unable to enjoy themselves. The main benefit of exports is simply to earn money that can be spent on other goods and services, or to pay for imports, and they can be seen as only a means to this end.
Why then is protectionism still so popular? There are numerous real-world examples of the benefits of a more open economy. Despite this, many still argue that we need to be saved from ‘cheap foreign imports’ which could wipe out inefficient local producers who must be sheltered behind protective tariffs and quotas.
In part this is because trade barriers typically provide a large benefit to a small number of people who find it easier to form lobby groups and attract sympathy. It is difficult for politicians to resist calls that ‘something must be done’ to protect small farmers, or steelworkers. The gains from free trade, though greater, are usually less visible and more evenly spread.
It is also all too common for trade to be presented as a zero-sum game: if one party gains, another must lose. For example, the elimination of tariffs on food imports is widely seen as a ‘concession’ that the UK needs to make to gain access to foreign markets, rather than (as it should be) a win for UK consumers.
There are many other flimsy arguments which still strike a chord with the public. In particular, it is often claimed that tariffs are necessary to protect jobs. It is true that free trade is likely to ‘destroy’ some jobs in some sectors. But free trade creates more jobs in those sectors where countries do have a genuine advantage. Jobs in these sectors are also likely to be higher paid and more secure.
Furthermore, lower prices do not just help consumers. Money saved by buying cheaper imports is money that can be spent on other goods and services, including those produced at home. Cost savings from cheaper imports also benefit other businesses directly. For example, lower food prices are good for the hospitality sector, and cheaper steel helps domestic manufacturing.
It is also often argued that competition from imports is ‘unfair’, perhaps because of lower standards, cheaper labour, or some other advantage such as government subsidies or economies of scale. My paper looks at these arguments in more detail. In short, they either do not stand up to serious scrutiny, or they are about problems for which tariffs are not the appropriate solution.
This is not to say that there are no costs from free trade. However, since free trade improves overall welfare, it should be possible to help those who might lose out to adjust – and still leave society as a whole better off.
It often feels like we have learned nothing from the Corn Laws, which imposed tariffs and other restrictions on imports of food in the early nineteenth century. Going back further, an Act of Parliament in 1571 made it compulsory for almost everyone over the age of six to wear a cap of English wool on Sundays and holidays, in order to support sheep farmers and hat makers.
The arguments of those opposing tariff-free imports now are usually rather more sophisticated. But they are still weak.
This piece was first published by 1828 on 19th July 2021
You can read the full IEA paper here