Economic Theory

In praise of naked trade

Peter Mandelson was the European Trade Commissioner from 2004 to 2008. You might expect him to know a thing or two about trade.

In a recent article in the Evening Standard, lambasting the government’s naiveté about international trade post-Brexit, he drew on this expectation. Having stated his credentials, Mr Mandelson explained that “international trade negotiation is a rough, tough business, not for the chaste or tender hearted”.

Why chastity would have impeded Mr Mandelson in his negotiations is a question we should probably ignore. The more serious peculiarity occurs in his next sentence: “If Mrs May thinks other countries are lining up to do us favours just because we ask nicely, she will be disappointed.”

Here is the simple error, peddled by every anti-trade ignoramus, from Donald Trump to Marine le Pen, that threatens the world with a new era of protectionism and falling incomes. When a government allows its citizens to buy goods from foreigners, untaxed and otherwise unmolested, it is not doing the foreigners a favour. It is doing its own citizens a favour.

Some readers will already know why. Forgive me for explaining it yet again. But when even trade commissioners do not understand, the repetition is apparently necessary.

Imagine two fictional countries which, for simplicity, I will call the United Kingdom and New Zealand. For various reasons, lamb can be produced at a lower cost in NZ than in the UK. Whereas the price of UK lamb is £20 a kilo, NZ lamb of the same quality costs only £15 (in the UK).

Without tariffs on imported NZ lamb, UK lamb producers will go out of business. But UK consumers save £5 on every kilo of lamb they eat. That £5 can then be spent on other things, making not only lamb consumers better off but also the Brits who supply them with other things – including, perhaps, former lamb producers in their new occupations. By consuming cheap imported lamb, the total consumption of UK citizens increases.

A 50% tariff on NZ lamb, which pushes its price up to £22.50, will save UK lamb producers but force consumers to spend £5 more per kilo of lamb. With less to spend on other things, total consumption is reduced and society is altogether worse off.

A more fanciful example may make the case clearer. Imagine that shoes began to sprout up from the floor of every closet in the country. Would the government benefit us if it taxed anyone who wore them by an amount slightly greater than their current retail price?

Shoe suppliers might be happy about the tax, of course. But the country would have been needlessly impoverished. All the effort and resources that now go into making shoes could have been liberated and put to other uses. Taxing these miraculous shoes would be rejecting a favour.

Imported shoes that arrive at half the price of locally made shoes differ from miraculous shoes only in their probability and the size of the gain. Taxing them so that they cost more than domestically made shoes is also rejecting a favour.

A government need not be kindly disposed to another nation to resist taxing goods imported from it. It need only be kindly disposed to its own population. Mr Mandelson’s failure to understand this may explain why, after several years of his rough and tough negotiating, Europeans still bear the cost of tariffs on all manner of imported goods.

It may also explain why he does not see the trade opportunity offered by Brexit. It will not come from the kind of unchaste negotiations in which Mr Mandelson revels. They take years to complete and result in screeds of terms and conditions that do as much to impede trade as to promote it.

The real opportunity lies in unilateral free trade. Britain should simply announce that it will do nothing to impede imports. The minute Brexit is completed, all import tariffs should be abolished. Let other governments impose whatever burdens they want on their populations, even by taxing imports from Britain. The British will still be better off.

This is the position that New Zealand has adopted since the mid-1980s. When recently trying to negotiate the Trans-Pacific Partnership trade deal, a political commentator remarked that this unilateralism put New Zealand in the position of someone beginning a game of strip poker already naked.

It’s witty but it simply repeats the Trump-Mandelson mistake. The goal of strip poker is to end the game with some clothes on. The goal of trade policy, by contrast, should be to get naked as quickly as possible. Which means there is no good reason to have trade negotiations at all. Everybody should simply stay at home and take their clothes off.

If some don’t, we might try to explain to them why they should. But we should do so already naked, if only to show them how attractive it is.

Politicians who impose Import tariffs do not protect their populations. They protect politically influential domestic businesses at the expense of the general population. Tariffs are not only economically damaging but corrupt. Theresa May’s government must use Brexit as an opportunity finally to abolish them.


Former Director of Research

Jamie Whyte is the former Research Director at the Institute of Economic Affairs. Prior to joining the IEA, Jamie was the leader of ACT New Zealand as well as the Head of Research and Publishing at Oliver Wyman Financial Services. He has previously worked as a management consultant for the Boston Consulting Group, as a philosophy lecturer at Cambridge University and as a foreign currency trader.

1 thought on “In praise of naked trade”

  1. Posted 12/05/2017 at 19:19 | Permalink

    As opposed to taxes and such, Britain may achieve some benefits similar to Switzerland with treaties and “win-win” approaches, as here we are “outside” Europe while being at the center of it. Trade is certainly going well. However, the bureaucracy is somewhat maddening, with “bilateral” (sic) treaties between the Swiss governement and Europe on everything imaginable. But apparently, as long as you have some economic weight, such treaties are within reach, and I believe the UK will be able to secure such profitable agreements after Brexit.

    Alexander Starf
    Switzerland flowers

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