Matt Ridley: Principles versus rules in free trade

Why does the European Union raise a tariff on coffee? It has no coffee industry to protect so the sole effect is to make coffee more expensive for all Europeans. 

Even where there is an industry to protect, protectionism hurts far more people than it helps. Last October the EU surreptitiously quintupled the tariff on imported oranges to 16 per cent to protect Spanish citrus producers against competition from South Africa and punish the rest of us. It imposes a tax of 4.7 per cent on imported umbrellas, 15 per cent on unicycles and 16.9 per cent on sports footwear.

I find that many Twitter trolls do not even realise that the European “single market” is actually a fortress protected by high external tariff walls. Yet external tariffs are pure self-harm; they are blockades against your own ports, as the economist Ryan Bourne has pointed out. We impose sanctions on pariah regimes, restricting their imports, not to help their economies but to hurt them. The entire point of producing things is to consume things (the pattern of pay shows that we work to live rather than vice versa), so punishing consumers is perverse. As Adam Smith put it, describing the European Union in advance, “in the mercantile system the interest of the consumer is almost constantly sacrificed to that of the producer”.

Therefore, after Brexit, Britain should try unilateral free trade no matter what everybody else does — and even if the United States turns more protectionist. So argues a group of 16 distinguished economists, Economists for Free Trade, the first part of whose manifesto From Project Fear to Project Prosperity is published today. They calculate that unilateral free trade would benefit the British economy to the tune of £135 billion a year. One of them, Kevin Dowd of Durham University, has also written a powerful new pamphlet for the Institute of Economic Affairs entitled A trade policy for a Brexited Britain.

He argues that unlike in every other kind of negotiation, unilateral disarmament works with trade. Dismantling barriers to imports — removing sanctions against your own people — reduces the costs of the goods for consumers, reduces the costs of inputs for most producers, lowers inflation, creates employment and boosts growth.

So the best negotiating strategy is liberalise first, talk second: dare others to follow suit. As Sir Robert Peel told the House of Commons in the Corn Laws debate in 1846, the government would cease “haggling with foreign countries about reciprocal concessions, instead of taking the independent course, which we believe to be conducive to our own interests”.

Like socialism, pure free trade has probably never been tried, but unlike socialism, the closer countries get to free trade the more they thrive. Consider three examples of unilateral economic disarmament: Britain after 1846-1860, Hong Kong and Singapore today. In all three cases, economic growth was far faster than the global average. Even China unilaterally reduced its tariffs significantly (albeit not to zero) some years ago — to great effect.

Free trade is the very opposite of elitism. Its benefits accrue disproportionately to the poor; its costs to the crony-capitalist rich. However, if this is to be another Corn Laws moment — a major economy taking the plunge for unilateral free trade — then we need to think through how best to dare the world to follow us. For we will run into the problem of how to deal with other blocs’ non-tariff barriers.

The big issue today is not tariffs but standards, or regulatory rules behind the border. How do you ensure that an import is not toxic or unsafe or made with slave labour? And how do you stop such concerns becoming an excuse for barriers against imports?

Tariffs are now mostly low, except in agriculture, but non-tariff barriers, especially in services, are high. As an economy dominated by services, Britain has a strong interest in trying to lead the world into services liberalisation.

Here is where the big battle is to be fought in future between two competing approaches, says Shanker Singham of the influential Legatum Institute Special Trade Commission. One, espoused mainly in the EU, is the prescriptive, rules-based system that specifies exactly how a product or service must be produced if it is to be allowed in. In the tradition of Roman civil law, this approach essentially prescribes the method as well as the outcome. China, too, increasingly works in this way, though its regulatory regime — “global standards with a Chinese character” — is something of a regulatory black box.

Such policy is essentially agnostic about consumer welfare: it is driven by producer interests and revenue maximisation for government. Our challenge is to shift the world trading system towards a better, common-law approach, which is principles-based, outcome-focused, consumer-friendly. Because of our history and the nature of our economy, Britain can be an effective champion of this challenge.

The issue boils down to defining the word “equivalent” as something other than “identical”. For the EU, the dominant approach has been harmonisation rather than mutual recognition: things must be done the same way everywhere within the single market. But outside, mutual recognition of outcomes is gaining ground: for example, between Australia and New Zealand, there is an agreement that “your agency judged this medicine or foodstuff safe, and that’s good enough for us”. Even the EU has accepted this approach of mutual recognition with other countries, although sparingly. This has to be the way to go. To paraphrase Deng Xiaoping, it does not matter what colour the cat is, so long as it catches mice.

The World Trade Organisation does provide a mechanism for this kind of equivalent mutual recognition. In the “technical barriers to trade” (TBT) and “sanitary and phytosanitary measures” (SPS) agreements, countries should mutually recognise their systems if the overall objective (safety etc) is the same, but the technical way of getting there differs. So the EU could arguably be breaching WTO rules if it argues that equivalence requires identical regulation.

Free trade works. I live in Northumberland, and it no more makes sense to deny Northumbrians access to products and services from abroad than to deny them cars from Sunderland, whisky from Scotland or lamb from Cumbria.

As Adam Smith said, you should never “attempt to make at home what it will cost [you] more to make than to buy . . . What is prudence in the conduct of every private family can scarce be folly in that of a great kingdom.”

Matt Ridley, a member of the British House of Lords, is an acclaimed author who blogs at www.rationaloptimist.com.