6 March 2019
Originally published by CapX.
A recent study estimates that the full burden of tariffs imposed by President Donald Trump fell on American consumers. As reports claim that the Department for International Trade (DIT) intends to cut 80-90 per cent of the UK’s import tariffs if Britain leaves the EU without a deal, that’s worth remembering. For though there were very different reactions to both stories, they are two sides of the same economic coin.
Import tariffs are taxes overwhelmingly paid by final consumers. They reduce consumer choice. In the longer term, they make the whole economy less efficient too, insulating industries from international competition, diverting resources to less productive sectors, and encouraging lobbying for similar protection. The best thing to do is remove them, irrespective of what other countries do, in turn creating a dynamic for firms to instead lobby for a good general business policy environment.
To an economist then, the reaction to the DIT proposals is perplexing. “Goodbye manufacturing, and goodbye agriculture,” tweeted Laurie Macfarlane, the economics editor of an organisation called Open Democracy. “Sheer lunacy,” “suicide” and “devastating” said others. Former BBC Newsnight editor Christopher Cook dubbed the plan “banana republic stuff.” So why is something so uncontroversial among economists generating so much anger among commentators?
The first explanation is one often heard from trade lawyers. The problem, they say, is that tariffs are no longer the key impediment to trade for a services economy. Tariff reductions are good for consumers, yes, but “disarming” unilaterally will reduce what we have to offer other countries in trade agreements. In effect, we give up “bargaining chips” to facilitate trade deals that benefit our exporters.
Yet there’s little evidence to support this take. Hong Kong has unilateral free trade, but has trade deals with China, New Zealand, EFTA and Chile. Ninety-nine per cent of imports enter Singapore duty-free, but the country has Free Trade Agreements with China, Australia, New Zealand, India, Japan, Korea, EFTA, Turkey and the US.
Economist Doug Irwin has shown two-thirds of the tariff reductions seen globally between 1983 and 2003 were undertaken unilaterally, during a period when major FTAs were signed. Extensive liberalisation was carried out in Chile, Australia, New Zealand too. All have plenty of FTAs.
FTAs have other benefits, such as preventing backsliding from both countries in a protectionist direction. But there is little evidence tariffs are necessary to secure them. That’s not surprising. If everyone knows non-tariff barriers, standards and regulations on service sectors are more important, free-trade agreements (FTAs) are still mutually beneficial even when one side is tariff-free.
A more compelling explanation for the anger we’ve seen then is politics. Keeping imports from the EU flowing into the UK without tariffs requires (under WTO rules) offering tariff-free access to the rest of the world.
Manufacturers and farmers losing their extensive EU protection will feel grievance. There will be losers. Given that the benefits of these tariffs are narrowly concentrated and the costs diffuse, the former’s cries of anguish eclipse consumer cheers. Some therefore see an opportunity to use this story to pressure MPs to vote to prevent no deal (under the backstop, we couldn’t unilaterally liberalise) or to reverse Brexit entirely.
These fears of negative reactions are presumably why tariffs on cars, beef, lamb, dairy and some lines of textiles will be maintained. But it’s worth noting that if reducing tariffs really would have the “savage” effects Remainers claim, this in fact shows consumers are currently greatly harmed by them and they should be removed.
Finally, there’s understandable anger from business at the process. Christopher Cook complains trade policy is being determined “in secret” without consulting those impacted by the policy. There is thus little certainty for firms who could find themselves under much more competitive pressure in just a few weeks.
Ideally, tariff reductions would, indeed, be phased in to give certainty to business and time to adjust. But Brexit itself is now going to be one form of trade shock and policymakers’ responsibility should be to set the best conditions to deal with it. The Treasury is right that the return of tariff freedoms should be used, with tariff-free imports assumed unless there is compelling reason otherwise.
The government should make this a permanent policy aim, deal or no deal. Linking it to “no deal” as if it’s an emergency measure to prevent rising prices is unhelpful, and implies that tariffs could yo-yo with third countries depending on whether we eventually get an EU deal.
But more broadly, they are wise not to open the setting of tariffs and their rates into a public consultation. If the industries learned their protection was to be removed or lowered, they would launch extensive lobbying campaigns; action which no consumer group would undertake. This would create severe pressure to reverse course, undoing the potential upsides.
Brexit is going to be an incredibly complex extrication. It will create winners and losers. But as Martin Wolf has outlined, one clear potential net benefit is cheaper food and manufactures. Free trade is something virtually all economists believe improves living standards.That economics doesn’t change depending on whether we’re talking about Trump or Britain.
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