We needn’t fear trade deficits with the EU, says new paper
IEA research covered in The London Economic
- The economic benefits of free trade come mainly from what countries import, rather than from what they sell overseas;
- Arguments against tariff-free trade usually boil down to saying that British families must pay higher prices to subsidise farmers or steelworkers who cannot compete with more efficient producers elsewhere;
- Our large trade deficits with the EU is not necessarily a bad thing: many UK consumers may prefer German cars or Spanish holidays;
- A new paper refreshes the arguments in favour of free trade in the light of three current controversies: cheaper agricultural imports, the impact of Brexit on UK trade, and lessons from the Covid pandemic.
The commonly held perception that imports are ‘bad’ and that we should reduce our dependency on global supply chains does not stand up to scrutiny, according to a new paper from the Institute of Economic Affairs.
Authored by IEA Economics Fellow and independent economist Julian Jessop, the research sets out why concerns about ‘unfair’ competition, or a belief in the benefits of self-sufficiency, translate to British families paying higher prices to subsidise farmers or steelworkers who may not otherwise be able to compete.
Contrary to the widely-held view, restricting imports will leave people worse off. If consumers shift from EU products to local UK products due to increased trade barriers with the EU, this should not be seen as a ‘benefit’ of Brexit.
Shoppers are already free to choose to ‘buy British’ if they choose to do so. While it may be tempting for governments to favour suppliers from their own country, or region, this is rarely in the long-term interests of the people that they represent. This form of protectionism usually subsidises inefficient production and undermines productivity.
International trade also allows countries to spread risks by accessing a wider range of suppliers, making them more resilient to shocks, as we have seen during the pandemic with vaccine development.
And concerns about the impact of imports on the environment are usually misplaced as well. Importing foods and other goods from countries that can produce them more efficiently can actually be better for the planet than ‘buying local’, even if transport costs are higher.
When it comes to free trade between nations, exports and imports are both beneficial to both parties – or else it would not happen at all. In short: Importing is GREAT, too.
Many support free trade in principle but still oppose any unilateral action to reduce trade barriers. There are 10 main objections:
- ‘Removing tariffs unilaterally would throw away a bargaining chip in future negotiations’.
- Tariffs are necessary to level the playing field when other governments subsidise their exports’.
- ‘Tariffs are necessary to protect domestic producers from cheap imports produced to lower standards’.
- ‘Tariffs are necessary to offset much lower labour costs in other countries’.
- ‘Tariffs are necessary to prevent trade deficits from getting too big’.
- ‘Only small countries, such as New Zealand, Hong Kong and Singapore, have adopted unliteral free trade’.
- ‘Tariffs raise billions for the Treasury – we need the money’.
- ‘We should be encouraging UK consumers and businesses to reduce reliance on foreign suppliers / buy British’.
- ‘Tariffs protect jobs’.
- ‘Unilateral free trade is a good idea in principle but politically unacceptable’.
In the new paper, Jessop counters each of these statements