Monday, October 10, 2016

Matt Ridley: Britain's chance to be the global champion of free trade


The prime minister wants Britain to be “the most passionate, most consistent, most convincing advocate for free trade”. Under  either Donald Trump or Hillary Clinton, and with world trade stagnating, it looks as if the job is increasingly likely to be vacant in March 2019, so Britain has both a vital duty and a golden opportunity. It worked for us before.

Next year sees the 200th anniversary of David Ricardo’s insight of “comparative advantage” — the counterintuitive idea that trade benefits “uncompetitive” countries as much as efficient ones.

If one country is better at making both cloth and wine than another, it can still pay it to get its wine, for example,  by making extra cloth to swap for the other’s wine. Or, as somebody once put it, even if Winston Churchill is a very good bricklayer (he was) it still makes sense for him to write books or run governments, and pay somebody else to build his walls.

So the government’s view of trade should be: the more the better, the freer the better, and unilateral is fine. There is no episode in history of a country opening itself more to world trade without getting richer. The Phoenicians, Athens,  Gujarat and Bengal,  Venice, the Portuguese, the Dutch, the Victorian British, America, Singapore, Hong Kong, China after Deng Xiaoping — in every single case, countries that opened to trade got much richer very fast. 

Dan Hannan, MEP, laments that we seem to have forgotten this, that young people are under the impression that trade is a zero-sum game and makes the rich richer and poor poorer: “We need to make the case for unrestricted commerce, as its earlier advocates did, in the kind of ethical language that the Occupy crowd will hear. Free trade is the ultimate instrument of poverty alleviation, conflict resolution and social justice.” Free trade is the enemy of complacent corporations and their crony conspiracies with corrupt politicians. It ensures that business serves its customers more than its owners.

Yet most of the current debate seems to be locked in a mercantilist view that trade is something governments arrange. As John Longworth, the former head of the British Chambers of Commerce and co-chairman of the new pressure group Leave Means Leave, points out: “Trade consists of a willing seller and a willing buyer. If the buyer wants a product and it is the right quality and price there will be trade. Governments do not trade, they only get in the way.”

Being in the EU has meant having no trade deals at all with America, China, Russia, India, Brazil or just about any large economy, despite decades of desultory negotiation. This hasn’t stopped us trading with them; hasn’t stopped them getting “access” to the single market — that is, selling the same product throughout Europe; hasn’t required them to join the protectionist single regulatory zone; won’t stop us having such access. The truth is, if it’s trade deals you want, the EU is the worst possible entity to be part of: it’s done fewer trade deals than most countries.

If the EU decides to punish its citizens by slapping a tariff on imports from Britain, that’s their funeral. Given the current devaluation of the pound our exports are about 10 per cent more competitive compared with the continent than they were before the referendum. Adding a tariff of roughly 3.5 per cent  under WTO rules would — as John Redwood puts it — still leave us 6.5 per cent more competitive, and them 13.5 per cent  less competitive. So, as Peter Lilley argues in a new Legatum/Centre for Social Justice pamphlet, written by four ex cabinet ministers: “We should simply announce that for the time being we will maintain our zero tariffs on imports from the EU — unless they choose to impose WTO tariffs on us, in which case we will reciprocate.”

Britain’s comparative advantage lies in high-value-added things such as investment banking, accountancy, law, advertising, design, research, higher education — things the rest of the world wants. As the financier Miles Morland put it in a recent essay, there is more investment banking expertise on the Isle of Dogs than in the whole of continental Europe put together. 

The world’s biggest advertising agency is British and its nearest  rival is American. Seven of the  top ten accountancy firms are headquartered in Britain, and only one elsewhere  in the EU; five of the top ten law firms, and none in the rest of the  EU; three of the top ten universities (versus none). London’s peers, partners and rivals are primarily the other nine of the top ten financial centres: New York, Hong Kong, Singapore, Tokyo, Seoul, Zurich, Toronto, San Francisco and Washington. That’s where the opportunity for growth, and the competition for business, lie.

We just don’t know how competitive British science, technology, medicine, even precision agriculture could be, once freed from the top-down dirigisme of Brussels with its myriad rules designed to stifle innovation and protect big companies from upstart competition. The distinguished medical scientist Sir John Bell says: “Britain is more inclined towards a relatively liberal risk-based regulatory environment that allows fields to move quickly — to reflect on ethical issues but not to over-regulate. The EU, by contrast, has a record of deep regulatory conservatism, attempting to legislate and control many aspects of science that are not deemed here in the UK to present a significant danger.”

If Britain were to become the global champion of free trade, as it did once before at the behest of Adam Smith, Ricardo and Richard Cobden, there would be creative destruction, for sure, and pain to go with the greater gain. But there’s little doubt that we could find ourselves growing at 4 or 5 per cent  a year. Think how that would transform our public services.
It is now more than three months since we voted to leave the EU. Neither Mark Carney’s promised recession, nor George Osborne’s promised punishment budget have happened, or look likely to. Every stock index, producer managers' index, growth forecast, employment rate and house price index that was supposed to plummet has gone up instead. Service sector growth is much higher than forecast. Only the pound is down, giving us a perfect competitiveness boost without significant inflationary risk. 

I am reminded of what happened in 1992 when we were ejected  by the markets from the exchange-rate mechanism and all the pointy-heads said we faced disaster, but  we had a boom instead.

Matt Ridley, a member of the British House of Lords, is an acclaimed author who blogs at www.rationaloptimist.com. This article was first published in the Times.

1 comment:

Peter Caulton said...

As usual a very reasoned article by Matt.Interesting that the industries you site as Britains biggest all make absolutely nothing.Britain’s comparative advantage lies in high-value-added things such as investment banking, accountancy, law, advertising, design, research, higher education, You are right Britain and our country also has to get back to producing stuff again.