Wednesday, November 25, 2020
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Free trade and the facts of life

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BORIS Johnson seems to have caught the imagination of many commentators with his bold call for Britain to champion the cause of global free trade. Speaking in the Painted Hall of the Royal Naval College, Greenwich, that glorious monument to Britain’s maritime past, the Prime Minister sought to rekindle the old entrepreneurial seadog spirit. 

Finally freed from the shackles of the EU, we should take on ‘the mercantilists’ and their protectionist tariffs, steer our own course as ‘the supercharged champion of the right of populations of the earth to buy and sell freely among each other’.  

It is a noble ideal and was preached with missionary fervour by nineteenth-century liberals. Richard Cobden even declared that the principle of free trade would ‘act on the moral world as the principle of gravitation in the universe’, uniting all races and creeds ‘in the bonds of eternal peace’. But as David Ricardo, who developed the doctrine of comparative costs (the economic justification of free trade) two hundred years ago, explained, the benefits of free trade accrue only under certain conditions. Contrary to popular belief, productivity has nothing to do with it. We could be the laziest, most unproductive nation in the world, and still benefit from free trade. Indeed, the greater the gaps in productivity, the greater are the potential benefits to all concerned so long as there exists comparative advantage, and so long as trade is conducted at the right rate of exchange – i.e. the rate that clears the markets and balances imports and exports. So, for example, even if I am more productive than you across the board, so long as you have a comparative advantage in certain sectors (i.e. the productivity gap is less there than elsewhere), your specialisation in those sectors combined with mine in the others will enable us to trade to mutual advantage. Provided that the exchange rate is free to fluctuate, trade imbalances will be automatically eliminated, for my trade surplus increases the exchange value of my currency, making your goods more competitive. The market takes care of everything and everyone benefits.

But what if I have other interests than eternal peace and prosperity? Suppose my aim is something like imperial domination, the continuation of war by other means. Suppose I am prepared to sacrifice the welfare and living standards of my people to achieve my ends, and I have the repressive power to do so. Trade would be an excellent way to go about it – provided I took a mercantilist approach, imposed tariffs and adopted protectionist measures.

The poor mercantilists have received a bad press ever since the eighteenth century when classical economists revealed the miraculous workings of the market’s invisible hand. Essentially, mercantilists believed that nations should aim to maximise their trade surplus and accumulate bullion – any surplus of exports over imports would generate an inflow of gold. They did not realise that all countries cannot simultaneously run surpluses, nor that trade might be carried on to mutual benefit. Like miserly hoarders, they lived not to enjoy the fruits of their labour, not even to save for the future, but to accumulate piles of gold.

But what if it were property, land, businesses, whole industries, technological know-how, communications systems and financial assets that were being accumulated? What if I exported vast quantities of consumer goods at artificially low prices and instead of allowing the exchange value of my currency to rise, so that your goods were more competitive, or opening my markets to your goods, I used my surplus to buy up your assets? I could then increase my asset portfolio year-on-year, a process that would soon become self-reinforcing, since the profits and dividends on those assets would now also flow to me, further increasing my surplus.

It would help a lot if all this could be marketed as ‘foreign investment’, as a ‘vote of confidence’ in your economy, as ‘securing jobs’ in otherwise declining or uncompetitive industries. I could buy up your institutions, fund projects, make generous grants and donations, and offer unrivalled ‘consultancy fees’ to those keen to further our trading relations – and be hailed as a great benefactor for my efforts. It would also help if, blinded by a naïve faith in the miraculous benefits of free trade, you opened up all your markets and eliminated all your trade barriers in the belief that others would follow suit – all in the interests of mutual trade, peace and prosperity.

One day, of course, the reality will dawn. But by then it will be too late, and perhaps you will no longer care. You will have been bought up lock stock and barrel. You will be in my pay and you will do my bidding, and not a shot will have been fired. For as Sun Tzu wrote in The Art of War, ‘The supreme art of war is to subdue the enemy without fighting.’   

Britain did very well in the past out of free trade, indeed founded an empire on it, but only because trade was conducted on its terms and enforced, in Palmerston’s words, ‘by cannon balls’. We no longer have the empire or the cannon balls. But we still have the option to protect our industries and raise tariffs, when required, in the national interest.

It is still not too late.

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Alistair Miller
Alistair Miller writes for The Salisbury Review

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