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Reflections on free trade

With the Brexit vote of last week continuing to send shockwaves through the corridors of power (does that mean those corridors are vibrating, door handles jiggling and lights flickering?), one argument I have seen break out is of how the UK will, without being in the mighty, efficient and effective mechanism of the EU, be able to work out a deal. (If you are detecting a touch of sarcasm, you are correct.) For example, on a social media exchange, a person earnestly exclaimed that the UK can’t possibly arrange a free trade agreement (FTA) with India because the Indians just won’t, just won’t agree on one with us, because, well, they won’t. A stock argument goes that if the UK leaves the EU, then depending on whether it does or does not retain Single Market access, like Switzerland, other countries will be reluctant to trade with the UK. Why? Because the only reason, it is said, that people want to engage with the UK is because it gives access to the rest of the EU. The UK is, on this argument, nothing more than a conduit, an entrepôt, for Europe. The fact that another country might want to deal with the world’s fifth-largest economy on its own right is scarcely entertained.

Funnily enough, last year I recall reporting on how Australia, which for some crazy nationalist reason isn’t in the EU, signed a trade deal with China, which much to its shame, isn’t in the EU either. China is the world’s second-largest economy; Australia is some way down the order but still relatively significant. These two nations signed a deal. It was done without all the structures of a transnational organisation. This is an event that, for quite a lot of people, is unthinkable, like a decent summer in England.

Another option for the UK is to simply declare unilateral free trade, rather than wait for some grand negotiation with the EU over access. There is a consideration of this approach at Econlog here:

But if the new British prime minister want to puzzle and indeed shock its European counterparts, this may well be the best option. Go ahead and zero tariffs on imports coming from the EU. It might well be one of those very few choices that could prove to be economically beneficially in the long run, not least because it will minimize the problem of capture by special interest groups when it comes to trade policy. But it may prove to be expedient from a political perspective too. As the government should run through the Houses its proposed “interpretation” of the vote (which was, after all, a consultative referendum), open support for free trade may help, in the short run, to restore peace and harmony among the Tories. On top of this, it might give the UK a strong card in negotiations with the EU, making retaliatory attempts hard to “sell” to the public.

And here is Tim Worstall on the same subject:

The entire point of trade is that we can get our hands on what they make: so why would we ever want to have anything other than unilateral free trade? Why would we impose tariffs on the very things we want and make them more expensive for ourselves?

Sure, other people might impose tariffs on our exports. But that means that they are making themselves poorer by not having tax free access to the lovely things that we can make cheaper or better than they can. As Joan Robinson was fond of pointing out, tariffs are like throwing rocks in the harbour to make imports more difficult. And just because you are throwing rocks in your harbour there’s no reason I should throw rocks in my own. To do so just makes me worse off and why should I do that?

As I have said recently, one of the excellent consequences of Brexit is that it rends apart many of the lazy assumptions that give rise to transnational organisations, as well as the assumptions of the sort of people who prosper in working for them. It makes us think again about what sort of rules and regulations, if any, are needed so that human beings can trade. And those of a classical liberal disposition need to take the lead in pointing out that ultimately, countries don’t trade, individuals do. Any attempt to interfere with such transactions is ultimately about Person A being prevented from transacting with Person B on terms to their liking.

Maybe it is also time to dust of the speeches and writings of Richard Cobden.


39 comments to Reflections on free trade

  • Lee Moore

    It’ll never work. Look at Hong Kong – total basket case.

  • Johnathan Pearce (London)

    Lee, I know. Amazing how that place ever survived. Seriously, I can just imagine the retort of the Remaniacs: “But Hong Kong is a one-off, a freak, and anyway was a colony and now part of China or something”

  • Lee Moore

    I’m sorry to say that I think that HK being a colony IS relevant. (A colony lucky enough to get Sir John Cowperthwaite rather than the sort of civil servants we kept for ourselves.) HK is not a democracy now, but its post colonial government is very much into bribing the population with goodies to keep ’em quiet. It is retreating from the high ground.

    The problem is that democracies give people a say, and people (not just the ignorant northern and rural savages who voted for Brexit, but most of the highly educated and informed Londoners who voted for Remain) believe strongly in Mercantilism. Letting foreigners sell their stuff to us without suffering brutal taxes, and letting our chaps suffer brutal foreign taxes when trying to sell their stuff abroad is like trotting onto the pitch without a goalkeeper. Madness. I’d like to believe otherwise, but I think approval of free trade is almost non existent. Of course lots of people say they support it, but they do so because they move in circles where it is the received wisdom. They believe in it in the same way that they believe in global warming. Because they don’t really know anything about it one way or the other, and it would be socially embarrassing to disapprove.

    But, except for those libertarian circles you move in, most people who say they approve of free trade couldn’t string together three sentences explaining why. And I’m talking educated people, not your hoi polloi.

  • monoi

    The problem with free trade as I see it, is that we have hobbled ourselves with taxes and regulations making ourselves uncompetitive, and people see it as un unfair playing field.

  • David Moore

    Given NZ seems to have survived having largely unilateral free trade for the last 30 years, I’d be a touch surprised to see the UK struggle with the it.

    I think a lot of the pro-EU camp are actively horrified at the idea of a successful, free trading UK.

  • There are several aspects to a simple declaration of free trade (specifically free of taxes, tariffs and quotas).

    The first is that it might catch on, making everyone a lot richer and releasing yet more billions from absolute poverty (provided the Kleptocrats in Africa and other places can still steal from their local oligarchs)

    The second is that it sets up an argument against the EU model of access to markets only at the cost of dead weight regulation, politics and infestation.

    The third is that if more and more countries do it then you are not trapped with a single market place and the dead weight of local regulation will be forced down by it.

    Finally, along with the departure of yet another country (NExit or FRexit) from the European Union, genuine, reciprocal free trade in the UK would probably be a stake through the heart of the European Union and that’s got to be a good thing.

    Let it dissolve into a simple free-trade area with visa free tourism and lets get rich trading with each other and the rest of the world.

    Finally, the majority of the French would absolutely hate it.

  • Quentin

    Rather than free trade, I prefer reflexive trade tariffs: we’ll trade with you with the same import tariffs that you impose on us.

  • Rather than free trade, I prefer reflexive trade tariffs: we’ll trade with you with the same import tariffs that you impose on us.

    I think this plays to the status quo and supports the European Union’s unsupportable pay-for-access model. Far better to take the high ground and set the example that Britain is open for trade, just like Hong Kong and Singapore have done so successfully.

  • Jacob

    “Go ahead and zero tariffs on imports coming from the EU.”

    Why only from the EU ?
    Zero all tariffs.

  • Why only from the EU ?
    Zero all tariffs.

    Indeed, when I say a simple declaration of free trade, I mean with everybody.

    North Korea wants to start shipping us slave made “Bono is Great” T-Shirts, absolutely fine. Can’t control a consumer boycott obviously, but there you have it.

    I’m sure the Social Justice bunch who go into apoplexy, which is another good reason to do it.

  • Ben

    If you click on the “Australia” link in Jonathon’s piece, it takes you to a page with a list of Australia’s free trade agreements.

    It doesn’t seem to have one with the EU.

    Knock me down with a feather

  • Brian Micklethwait (London)

    David Moore:

    I think a lot of the pro-EU camp are actively horrified at the idea of a successful, free trading UK.

    I strongly agree with this. I think the Remain nightmare wasn’t that Leave would cause lots of problems, but that these problems would be solved, by Britain adopting policies that they hate.

    I voted Leave for the similar reasons. The problems cause by Brexit are indeed problems. But on the plus side, they are a crisis that we shouldn’t waste, and even better, may very well even contrive not waste, or not indefinitely. If our preferred policies of free trade are (eventually) adopted, this will accomplish a lot of good.

  • Thailover

    “Rocks in the harbor”

    This is why I’m always a proponent of the separation of economics and state. Economics gains via good will. Politics gains through fear mongering. Economics prospers through freedom and lack of restrictions. Politics gains through restrictions of liberty, often termed “regulations”. Economic prosperity is about voluntary cooperation to mutual benefit, i.e. free trade, whether that trade be goods, services and money (liquid wealth), or interpersonal interactions with friends, family and strangers. In the latter case, the currency is virtue. Whereas the advancement of politics means restrictive rules, permissions (if you’re lucky) and out-right bans.

    Politics doesn’t create liberty. It can’t. It merely pretends to create liberty it influences other more restrictive, more draconian political fetters.

    Only win-win, voluntary cooperation to mutual benefit, creates true prosperity, i.e. an increase in the quality of life. And that’s done through economic exchange, tangible and emotional, not via bureaucracy and government keepers.

    If the EU masters wished to be leaders rather than rulers, they would welcome free trade with GB, and watch as Europe prospered, being leaders of an improving, flourishing land. But alas they’re not interested in being leaders of a prospering land, they’re interested in ruling the desperate. They don’t want nations to stay in the EU because nations will ACTUALLY prosper by doing so, they want nations to stay in the EU because they’re afraid to leave.

    Leaders revel in growing prosperity and freedom.
    Rulers are fear peddlers.

    ‘Even more reason that it’s a good thing that GB, like Plato’s cave slave, tossed off it’s shackles, left the supposed security of the shade and now faces the difficult task of prospering in the sun, a more honest and authentic existence.

  • Thailover

    John Galt wrote,

    “Indeed, when I say a simple declaration of free trade, I mean with everybody. North Korea wants to start shipping us slave made “Bono is Great” T-Shirts, absolutely fine. Can’t control a consumer boycott obviously, but there you have it.”

    ‘Curious thing for someone named John Galt to write, considering the “North Koreans” i.e. the people themselves, are’t aided but rather further harmed by said trade, which feeds the overlords that crush them. To aid those who wish to destroy rational values is a form of intellectual treason.

    Search for the phrase “suffering as such is not a value” in John Galt’s speech in Atlas Shrugged, and read to the end of the paragraph.

  • Thailover

    Monoi wrote:

    “The problem with free trade as I see it, is that we have hobbled ourselves with taxes and regulations making ourselves uncompetitive, and people see it as un unfair playing field.”

    To hobble oneself with taxes and regulations is to not practice FREE trade.

  • Bruce Hoult

    As others have noted, New Zealand declared unilateral free trade in the 80s, along with a bilateral agreement with Australia.

    In 2008 NZ concluded a free trade agreement with China, the first western country to do so. Yes … that place that floods the world with cheap goods. The result? A massive increase in exports to China and a positive trade balance.

    NZ is also nearing agreement with India, and broke off talks (more advanced at the time I think) with Russia because of Crimea.

  • Thailover

    “Sure, other people might impose tariffs on our exports. But that means that they are making themselves poorer by not having tax free access to the lovely things that we can make cheaper or better than they can.”

    This is a key point, (and correct).
    But the usual protectionist propaganda is that tariffs are GOOD for a nation and not merely punishment for a naughty foreign body. It’s supposed to be good because fettering the influx of quality motorcycles (as an American example) bolsters sales for domesticly made motorcycles, such as Harley Davidson and “creates jobs” is the usual troglodite-minded mantra.

    However economics 101 shows quite clearly that tariffs and other means of hobbling trade creates DWL (“dead weight losses”) i.e. inefficiencies in the market…at one’s nations’ expense. In short, it harms consumers (reduces consumer surplus ) more than it helps producers/employers (increases in producer surplus), resulting in LESS Total economic surplus for a nation. In short, what monies are saved by buying cheaper imports can be spent elsewhere at the corner butcher’s shop or coffee house, which ALSO stimulates domestic jobs and domestically produced goods and services, and improves quality of life of both consumer and produer.

    Watching these two videos may change your life. Please watch them in order.

  • PersonFromPorlock

    Free trade may be a case of ‘necessary but not sufficient’. If you have no constraints on imports, but your government does inflict other costs on business that governments abroad don’t (viz., minimum wage, paying for social programs), you are going to have your businesses moving offshore.

    I don’t have a solution, but that doesn’t mean there isn’t a problem.

  • Thailover

    Person from Porlock,
    Having at least part of your business offshore is a good thing for everyone involved foreign and domestic.

    I don’t know if the numbers in the follow example still holds, but they were good as of a few years ago, but it’s to illustrate a point.

    Apple has (or had) 40k domestic (American) workers, and about 20k foreign laborers in Asia.
    Of course, Labor in Asia is much cheaper than labor in America, BUT keep in mind that Asia has a much lower average standard of living and lower living costs, and even so are earning many times the average national wage by being voluntarily employed by Apple and earning less in absolute dollars than the domestic Apple worker would per unit time.

    If America “brought those jobs back home” as is the usual war cry of protectionists, then the price of apple products would increase at least 50%, decreasing demand for said products, causing Apple to lose market share and production would decrease, resulting in massive labor layoffs, and estimates suggest that LESS than a total of 40K workers would remain employed.

    We can think of the cheaper foreign labor as a form of mutual gains via comparative advantage. Everyone gains by having cheap foreign labor and everyone loses if we rip those jobs from under the feet of Asian workers.

  • Nemo

    Thailover, from experience of those who espouse the ‘tariffs protect our workers’ line, I find Econ 101 a sure way to lose their attention; I’ve noticed far more positive response to simpler principles – that behind tariff barriers you end up with the products manufacturers want to make, rather than what customers want to buy, and only those who can afford the tariffs can buy the nice, innovative stuff from abroad, whereas with free trade, if the domestic producers make stuff people wanted there simply wouldn’t be a market for the importer. Recounting a few tales of the slapstick practices of institutions such as British Leyland or GPO Telephones usually clinches it with older listeners though the concept of the ‘Friday Car’, the Allegro losing wheels at motorway speeds, or the whole Morris Ital farce are often just too incredible to the smartphone generation.

  • Thailover

    Nemo, similar examples for Americans include our automobile industry in the mid ’70’s. One could buy a brand new Chrysler and the transmission would fall out of it within the first 10 miles one put on it. But like you say, such examples weren’t experienced by the smartphone generation. Ironically perhaps, foreign made Toyota imports SAVED our domestic car industry by forcing them to pull their heads out of their posteriors and offering necessary push-back to the ever-greedy automobile labor unions.

  • Thailover

    I’m sorry, in my post above, the transmission would fall out of a new Chrysler within the first 10k miles, not necessarily the first 10 miles. LOL.

  • Paul Marks

    I suspect that in real terms (purchasing power parity and all that) that China is the largest (not the second largest) economy in the world – but it is very hard to know for sure (as Chinese figures are not to be trusted).

    Manufacturing (actually making thing) is vital for a country such as Britain – we can not get by by selling raw materials and farm products as Australia does.

    And official lies (from economists and so on) the endless statistics that say manufacturing is doing fine – raise hollow laughter from people who see the ruins of factories in Britain and the United States (and much of Europe) and the endless “Made in China” stuff in the shops.

    But Protectionism is NOT the answer (for Britain or the United States) Donald Trump and the (FASCIST) “Alt Right” are wrong.

    British (and American) industry must become more competitive.

    And that means radical deregulation.

    No more “Social Justice” – no more Cameron and Osborne or the American “Bleeding Hearts” either.

    Get rid of these endless regulations – in Britain, the United States and (especially labour market regulations) in the continental European nations also (bleep the E.U. – it is going to die anyway).

    And much lower ENERGY COSTS.

    Again the policy of Mr Cameron and Mr Osborne must be ditched.

    As must the mad high energy cost policy of Chancellor M. in Germany.

  • PersonFromPorlock

    Thailover and Nemo, I take your points, but a consequence of importing less expensive foreign-made goods is that the local workers who lost their jobs can’t afford to buy them – and many other things – even at the lower price. So you end up with a bifurcated economy where those who have work live better than they might, because they can afford more stuff, while those without work live worse than they might if they were employed producing the employeds’ stuff for sale at higher prices. I think this is pretty much what we see in the US today.

    The lower quality and limited selection of products behind a tariff wall is a good point, and well illustrated by the terrible cars the US was producing in the late ’70s. But that wasn’t a direct result of tariffs so much as of a conscious choice by car makers to rely on styling and advertising rather than quality and performance to sell their product. Once the Japanese makers began to show that better cars were possible at ‘normal’ prices, US manufacturers had no choice but to improve. US makers could get away with shoddy products as long as US car buyers could be kept ignorant of what was possible, but forty years on into the Internet age, that degree of insulation is no longer possible.

    As I said above, I don’t have a solution, and there may not be a solution. But a ‘free’ market (especially in a world where business is eager to buy what politicians are eager to sell) has its problems, too, and it may be that some tariffs would do more good than harm.

  • Thailover

    Nemo said,
    “I find Econ 101 a sure way to lose their attention”

    Perhaps using concrete examples might help.

    Example 1. Bob works in a hat making factory. Amerian Steve buys the American made hat.

    Example 2. Bob imports and sells hats made overseas by Ying Lee, and sells a hat to American Steve for half the price he would have spent in example 1. Bob sells a lot more hats because they cost half of what they would in example 1. Steve then uses the money he didn’t spend on the hat and buys a nice steak dinner.

    Bob’s situation is much the same in example 2. He has a job and makes a living, though I don’t hear people say, “I want my child to grow up and spend years working in a factory”. American Steve’s situation is much improved in example 2 and I think we can say that Ying Lee is better off in example 2 as he would have only lesser options open to him rather than the option he chose in example 2, i.e. making exported hats. That is, we can presume that since Ying Lee chose, of all available options, to make and export hats in example 2, that this is better for him than the one-less options open to him in example 1.

    The “taking our jobs” mantra doesn’t quite ring true. We could talk of 300 hat-making jobs in example one and just as easily talk of 300 importing and selling jobs in example 2.

  • Thailover

    Toyota didn’t show that stylish cars could be sold in America at ‘normal’ prices. They showed that Americans were willing to spend nearly twice the money to have a reliable automobile. Nothing short of an import ban, i.e. having a complete monopoly in the states, could keep American car companies from eventually circling the drain to bankruptcy.

    On your other point, the alternative to having a particular propped-up job isn’t unemployment, but rather finding yourself another job.

    Comparative Advantage is a real thing. Imagine the following example.
    Canadians love bananas. Costa Ricans love maple syrup. (I have no idea if this is true, I just made it up).

    Canada could create a banana industry by using hot-houses to grow banana trees. Perhaps they can even use hydroponics.
    Costa Rica could do much the same with maple trees, growing them in environment controlled indoor conditions. Many people could be employed growing hothouse bananas and maple trees.

    BUT, what they do instead is trade Costa Rican bananas in exchange for Canadian maple syrup, and what each nation saves in production cost can be passed on to the consumer in savings, so they can purchase more domestic products.
    But, some might inquire, what of the hothouse workers? They can’t buy bananas if they’re unemployed. But the question now is, WHY would they be unemployed? They can have another job, perhaps making maple syrup to export to Costa Rica.

    If we are serious about asking what of the jobs we lose if we eliminate a boondoggle, then we have to ask what of the hand-shovel using ditch diggers when they lose their jobs due to the use of backhoes on a construction site. Then we have to remember that it’s the backhoes and other labor-saving equipment that makes construction contracts affordable and numerous enough to create the OTHER construction jobs (other than manual ditch digging) available for to these construction workers to do.
    In the end, greater efficiency produces lower costs and greater productivity…and thus more jobs.

  • Paul Zrimsek

    It occurs to me that NAFTA could just as easily stand for North Atlantic Free Trade Agreement. Hmmm…

  • Thailover

    Quentin wrote,
    “Rather than free trade, I prefer reflexive trade tariffs: we’ll trade with you with the same import tariffs that you impose on us.”

    But the problem with that idea is that not only do tariffs raise the prices of imports, it raises the prices of domestic like-items as well. In other words, creating a sort of “domestic produced” cartel or monopoly results in higher consumer prices and subsequentl less production too. Add to this that those tariffs are at the expense of the foreign competitor, but they’re PAID by the domestic consumer. In other words, those government rat bastards are just inventing another way to tax away your income by reducing your purchasing options.

  • Lee Moore

    If I might briefly complain about Thailover’s banana and maple syrup example.

    Which is an example where Canada can produce X more cheaply than Costa Rica can; while Costa Rica can produce Y more cheaply than Canada can. But free trade still works even if Costa Rica can produce both X and Y more cheaply than Canada.

  • Thailover

    Lee Moore, quite so. Nicely said.

  • Julie near Chicago

    Johnathan, to your very first question: No; that would be polgergeists. Don’t you remember the words of the immortal Economist of Stratford-upon-Avon:

    “Cry Brexit! and let slip the poltergeists of trade.”

  • Nicholas (Unlicensed Joker!) Gray

    Yeah, well, New Zealand has a self-made millionaire for a PM, as does Oz, so you can see why they might think free enterprise and capitalism are good ideas. Just wait until a more normal person gets in charge!

  • Julie near Chicago

    I thought I’d fixed the typo. :>(

    Oh well, I know that poltergeists of another sort inhabit my keyboard. Or I thought I knew it. Maybe they’re really polgergeists, out of pout because I writing about other Creatures of the Dark.

  • thefattomato

    With regards to unilateral free trade;
    Could the UK parliament decriminalise the collection and payment of tariffs, especially EU imposed tariffs, for products imported into the UK?

  • PersonFromPorlock

    June 30, 2016 at 8:00 pm

    Example 2. Bob imports and sells hats made overseas by Ying Lee, and sells a hat to American Steve for half the price he would have spent in example 1. Bob sells a lot more hats because they cost half of what they would in example 1. Steve then uses the money he didn’t spend on the hat and buys a nice steak dinner.

    Oh, come on! Bob doesn’t ‘make’ hats, he hires Steve to work in his hat factory. Then he fires Steve and outsources to Ying Lee. Steve doesn’t buy any hats or any steak dinner because he doesn’t have any money.

  • Thailover

    PersonfromPorlock said,
    “Oh, come on! Bob doesn’t ‘make’ hats, he hires Steve to work in his hat factory. Then he fires Steve and outsources to Ying Lee. Steve doesn’t buy any hats or any steak dinner because he doesn’t have any money.”

    LOL, I’m fully expecting you to start dropping words and phrases like “working class”, “proletariot” and “bourgeoisie”. You know, ‘Marxisms’ like that.

    Again, we can talk about 300 jobs making hats or 300 jobs importing and selling hats. In the latter case, EVERYONE’S better off. The pre-adam smith idea that manufacturing is “good” and importing is “bad” is simply failed economics.

    Do you know ANYONE who has said, “I want my child to grow up and spend half their life working in a factory”?

    I don’t.

  • Re PersonFromPorlock July 1, 2016 at 4:44 pm, I think the currently-relevant parable is rather this:

    “Bob hires Steve and friends to work in his hat factory. Then the state mandates that all these Steves be paid ever-higher minimum wage and be given a heap of costly regulatory and PC “protection” – overtly to protect “minorities”, but Steve and friends are impacted. The costs and inconveniences of outsourcing to a bunch of Ying Lees abroad are now outweighed by this, so Bob rapidly outsources to Ying Lee and friends. He also revises his line, making fewer and costlier hats to target a higher-end market back home, since Steve is now economising on hats. Steve and some of his friends decide the problem is they don’t have enough protection. They therefore demand protection from Ying Lee, but since the keenest regulators blatantly hate them, they also demand new people in charge of the regulators.”

    I think Adam Smith’s ‘principle of comparative advantage’, which Thailover was trying to illustrate, is an economic truth. I also think Steve is quite capable of outperforming Ying Lee (either by making hats or by gradually moving to work where he has the advantage of Ying Lee as the Bobs, unprompted by regulation, only gradually outsource), were Steve not handicapped by being protected from himself by intellectuals without intellect.

    To avoid misunderstanding, let me say I think there are excellent reasons why we should control immigration – that is, why any government has a duty to its citizens to control its borders. The above parable is about a not-so-excellent reason for trade control that gets confounded with that – and that will be with us at least until we reform today’s regulation mania. Fighting it without acknowledging its contingent truth will be folly.

  • Laird

    I agree with Niall’s last comment. All of it.