Sunday, July 31, 2011

Peter Saunders: Faith in free trade

Should a country really be content to see its core manufacturing base disappear? Free trade is an article of faith for economic liberals.

The arguments that favour it are well known. The theory of comparative advantage tells us that all countries will be better off if they specialise in doing the things they can do most efficiently and then trade their products with each other. And history tells us that when nations start erecting barriers to trade, it can trigger recessions and even lead to wars. And yet ...

In Britain recently, the country’s last manufacturer of railway rolling stock, Canadian-owned Bombardier, announced it was laying off 1,400 workers at its Derby works. Bombardier had lost its bid for a £1.5 billion government contract for new carriages to Siemens in Germany, so the work will go there instead. Look around the European Union: 100% of French rolling stock is built in France; 90% of German rolling stock is built in Germany; but now, in the country that invented the railways, British rolling stock will no longer be built in Britain.

Politicians shrug their shoulders and blame each other. They assure us Siemens can provide the carriages cheaper (mainly because they can borrow the capital at lower rates of interest), so British taxpayers will be better off than if Bombardier built them. Economists say the 1,400 redundant workers will find other jobs in sectors where Britain still enjoys a comparative advantage.

But in my lifetime, I have seen British manufacturing collapse and welfare dependency spiral as a result. Large parts of the country now have little or no employment outside the bloated public sector. Manufacturing has dwindled to only 13% of Britain’s GDP. True, there are other areas where the country performs much better. Financial services make up 10%, for example. But those redundant Derby workers are not about to find employment in the City of London.

I’m not an economist, but have the British taxpayers really gained by giving this latest contract to Germany? They may have saved a few million on the purchasing cost, but how much extra will they pay out in welfare benefits? When Smith and Ricardo were writing about free trade, governments weren’t responsible for almost half the nation’s GDP. Does the theory of comparative advantage still stand up when government is the major purchaser and supporter of those thrown out of work because of its purchasing decisions?

Should a country really be content to see its core manufacturing base disappear like this? It’s not inevitable in a globalised economy – Germany, for example, seems to have found a way to remain competitive in manufacturing, even against the rise of China, India and Brazil.

Of course, Britain is a member of the European Union, and EU rules prevent member states from favouring their own businesses. But the French and German governments seem to have found ways of ensuring that major public sector contracts go to their own companies, whatever the EU rules say, and their people do not seem to be worse off than the Brits as a result of their politicians massaging the free trade rules.

Peter Saunders is a Senior Fellow with the Social Foundations Program at The Centre for Independent Studies.


Sally O'Brien said...

At the core of this question is your idea of the role of government authority in society. Should the government be running railways? Should the government increase their spending on such projects during times of recession to bolster employment? Should government see it's role as overseeing/running the economy? That is the strategy that Obama is following - how is that working for him? 

Are we better off with a bloated government that administers nearly half the economy for various social goals and heavily regulates and taxes what's left of it? Or are there certain limited roles for government authority? Are we better off with a properly limited government that does it's job as efficiently and cheaply as possibly so that it does not become a massive burden that destroys the prosperity of the people? If you believe the latter then the few government contracts that are left should be assigned on no other basis than the best value for money.

Anonymous said...

The biggest problem with the British Economy, is their "Town and Country Planning System". The McKinsey Institute Report on Productivity in the British Economy, in the 1990's, sounded the first alarm bells. Now there has been a series of books and papers from Alan W. Evans and colleagues from the University of Reading; the Barker Review; a series of papers from the "Spatial Economics Research Centre" at the London School of Economics (Cheshire, Hilber, Overman and colleagues); and OECD Reports on the British economy.
Inflated urban land prices and lengthy, costly planning permission processes, destroy a nation's industrial base.
The Japanese economy hit the "run out of urban land, speculative price bubble follows" wall in 1990. The British economy has been hitting it repeatedly in 17 year cycles ever since 1947.

- Phil

Anonymous said...

If the British want a manufacturing sector, they are going to have to lose their stupid ideas about "Green belts", "preserving farmland" (any nation can buy food internationally just as cheaply as they can produce it themselves) and glorious multiculti open ended immigration.
Only 8% of their land is actually urbanised, and their green belts contain approximately that much land again. They could retain plenty of non-contiguous Green space and provide for decades of urban growth and bring their urban land prices down and make their economy competitive again - if they had the brains. NZ could do the same - if we had the brains. We've got much less excuse than them, for this stupidity, because we are "preserving farmland" not to feed out own workforces, but to sell at a near loss to nations that then export high value stuff back to us.