Tuesday, March 14, 2017

Barriers to Trade

Let me make a terrible confession; I'm a globalist and I support free trade.

Except during unusual circumstances -  as when repealing the Corn Laws was necessary to stop people starving (and still brought down the PM who did it and split his party for 20 years) a policy of free trade is rarely popular: as Lord Macauley wrote nearly two centuries ago.

Yet the truth is that free trade is a massive creator of wealth and prosperity, as is a certain amount of free movement of people, provided you don't go to bonkers extremes (as the 1997-2010 Labour government did at certain stages of their term of office, which is why there is such strong resentment about immigration in some parts of Britain.)

The answer to those who complain that the gains from free trade are not always fairly distributed (which is often true) and that some vulnerable people lose our from free trade (also often true) is not to throw the baby out with the bathwater and follow the disastrous policy which is perversely called "protection" but to make sure that a reasonable proportion of the immense net gains which a country following free trade will make are used to help those who lose out to re-skill or move and ensure that transitional help is available to communities which are badly affected.

I am not a fan of the style of journalism practiced by the Sun newspaper and when I noticed that they had published this week an article about how "There is no Brexit cliff" by Matt Ridley I was expecting it to be an overoptimistic panglossian Brexiteer fantasy about how easy the trade negotiations with the EU will be.

But I had a look at the article and found that I was doing Matt Ridley an injustice.

His article contains an excellent explanation of how silly the attitudes to trade of many journalists and politicians are and points out a very important distinction between the trade elements of the Brexit negotiations and any of the other trade deals which people have trade to negotiate with the EU.

As he points out, the difference between the Brexit negotiation and any other trade deal is that:

"It is unlike any other trade ­negotiation, because at the start there are no existing tariffs or differences in regulation and standards between Britain and the EU.

We would like to keep it that way as far as possible, and so would most European commercial interests and consumers.

We will have to discuss introducing trade barriers from scratch.

In every other case, it’s a matter of “we’ll remove tariffs and barriers to your exports if you’ll remove the barriers to ours”.

Note in passing that this is the wrong way round. Imports are what we want. Exports are what we are prepared to give to get them.

After all, we impose sanctions on evil regimes to deprive them of imports.

If we ran our lives the way ­politicians talk about trade, we would insist on giving a shopkeeper as much money as possible, then reluctantly accepting some of his goods."

Two very good points. You can read the whole article here.


Jim said...

I could almost write an essay on this topic. For a long time I have figured that imports are better than exports, and exports are just a way of paying for imports.

Imports are real tangible things, things that take real resources to make or extract. In return for these nice things we give currency, or an IOU. (actually its an IOU nothing, but that's another topic, we will stick with IOU)

So we get to the point where we have imported loads of nice things, and someone else holds lots of IOUs from us. So we export goods out, and low and behold the IOUs come flooding back.

Some people argue that countries like China should be glad of our custom and we are buying all these Imports from them, as it gives them jobs. Have you ever heard such rubbish. Jobs are not an end, they are a means to an end. Very few people work because they love their job so much, they work to get paid at the end of the month, so they can buy stuff.

Do you think the Chinese working in the washing machine factory's are thinking "why do foreigners want these things? don't they have any rivers to wash clothes in?" of course not. He would love to take one home, but its us foreigners who are buying them as we can pay more for them.
Just remember its IOUs here, so that means in the end they will have so many IOUs the Chinese can pay more for our products than we can domestically, though as you point out, its may well not be the person who made the washing machine that gets our export.

I have stated before several times that no one wants more money, and its true they don't. What people do want is stuff they can exchange money for.

Same rule applies to foreign trade, no one wants our money, what they want is stuff they can exchange our money for. And if you have lots of £ sterling because you sold lots of goods, then which market do you think you can exchange your £s for good stuff easiest? oh yeah, the UKs.

Chris Whiteside said...

Exactly why I liked Mat Ridley's article. The point he is making and which you are supporting, Jim, is absolutely right and is one which is not heard nearly often enough.