Policy Exchange have released a report today entitled, Global Champion: the Case for Unilateral Free Trade. There are many good points raised in it. The paper reminds us that free trade is a good thing, for both rich and poor, and that a lot of the myths surrounding it are just that. “‘Food security’, for example, is best achieved by maintaining strong trade links, not by trying to become autarkical in food,” it reads at one stage, making an invaluable point. It repeatedly makes note of the fact that lower tariffs mean that goods will be cheaper, and that jobs should be more plentiful as markets open up.
Yet the thesis of the paper is sorely lacking overall. This is because eliminating all tariffs is a bit like eliminating all immigration control – love to see a Policy Exchange paper advocating that – that to a liberal such as myself sounds wonderful in theory. As ever, though, reality bites.
There is a reason beyond just basic protectionism that governments put tariffs on goods entering their country. One is that a tariff is part of an overall negotiating position when trying to set up free trade deals with other countries. Remember that trade deals involve a whole lot more than just tariff levels. Lowering a tariff by 2% might just set you up for something that would be valuable in return, for instance. By declaring them all dropped, you lose this. But there are much more salient reasons for why no tariffs might be problematic.
“Dumping” is the chief problem. If we lived in a world in which every country was a liberal democracy, we may just about be able to eliminate tariffs across the board. Every country would be subject to market forces, thus there would be a relatively level playing field. But this isn’t the world we live in, sadly. China, for instance, is run by a democratically unaccountable oligarchy that runs most of the economy centrally and thus can “pull a Walmart” on the UK if it went the zero tariff route. To explain, it could flood the UK market with cheap goods until it put all local providers out of business – once that was achieved, they could then pull up the prices as much as they liked. I’m not saying China would definitely do this if the UK had no tariffs – I’m simply pointing out that we would be opening up this possibility. This is called “dumping” for a reason. Sure, the WTO has some protections against dumping – most of them involve, you guessed it, being able to impose a tariff that would normally be breaking the rules. This wouldn’t be available to a country that has no tariffs for obvious reasons. Dumping isn’t mentioned once in the Policy Exchange report.
I use the Chinese situation above to point out that eliminating all barriers to the UK market could have devastating effects on the domestic job market. The gap between rich and poor could open up to unsustainable levels. Again, not saying this would happen, but it very well could.
To repeat, I’m not saying this because I don’t like the idea of a tariff free world: like I say, I would like to think that someday it will be possible. I just don’t think that day is today for all the reasons above. No wonder the Brexiteers like the idea – it is a lot like Brexit, a jump into the unknown.
To explain, it could flood the UK market with cheap goods until it put all local providers out of business – once that was achieved, they could then pull up the prices as much as they liked
And… why is that a bad thing? We in Britain would get a few years of cheap goods out of it, and then when they put up the prices again, we could switch back to local providers.
People always complain about ‘predatory pricing’, eg, supermarkets putting independent local shops out of business with unsustainable low prices and then whacking them up once the competition goes out of business. But it never works in the real world, for the simple reason that in order to make it work, you have to, once the competition is out of business, recoup your losses by putting the prices up to way above what would otherwise be the market rate. But if you do that, then it suddenly becomes economical for the competition to swoop back in and undercut you — which they invariably do.
[Of course, supermarkets do put independent local shops out of business — but they don’t do it by predatory pricing or ‘dumping’, they do it by using their economies of scale to do things more efficiently, ie, they have lower prices than the competition but sustainably lower prices. And this is a good thing because it means stuff gets cheaper.]
Like cartels, which never hold for long because the rewards for being the first to defect are so great that someone always does, this is a phantom, not a real, danger.