Saturday, July 09, 2016

Brexit and Free Trade

Much of the discussion of the recent British vote to leave the European Union takes it for granted that the result will be less free trade for the U.K. While that is possible, so is the opposite result. Britain can still negotiate a free trade agreement with the EU, as several non EU countries have done, assuming both sides want it. And leaving the EU leaves Britain free to negotiate free trade agreements with other countries, most obviously the Commonwealth.

The critical issues are the positions of the U.K. government and its potential trading partners, including the EU. Many who voted for Brexit were motivated by a desire to reduce trade and/or immigration, but not all. The winning coalition seems to have included both protectionists and free traders. The free traders who voted for Brexit plus the free traders who voted against it might well add up to a majority.

For those who supported free trade, the objection to the EU was the rest of the package, in particular extensive regulation. Many people take it for granted that if you have free trade such regulation is needed to prevent countries from cheating, regulating the national market in ways that favor their producers. That argument assumes that national governments want to cheat on free trade. It treats a free trade agreement as a deal where each country gives up something it values, its own trade restrictions, in exchange for the other country doing the same. 

Much talk about trade views it that way. Politically speaking that view is correct, since trade restrictions are a way in which politicians can benefit well organized producer groups in exchange for their political support. Economically speaking, however, that view is false. The gain from protecting U.K. manufacturers from foreign competition comes at the cost of their customers and U.K. export industries. 

Unilateral free trade, the policy of England in the 19th century and Hong Kong in the 20th, produces a net benefit for the inhabitants of the country that adopts it, quite aside from any benefits to their trading partners. From the standpoint of the welfare of the citizens rather than their rulers, the usual trade negotiation consists of each side offering to stop shooting itself in the foot in exchange for the other side doing the same. If governments engaged in trade negotiations were trying to maximize the welfare of their inhabitants, there would be no need for either tariffs or agreements on regulation, since there would be no incentive for the governments to use regulation to cheat on trade agreements.

If supporters of free trade in the U.K. and potential trading partners are sufficiently numerous and sufficiently well informed, Brexit should lead to an increase in free trade. If they are numerous but poorly informed, believe that the benefit comes from a trading partner abandoning its restrictions, it still might lead to an increase. We will have to wait and see.


jdgalt said...

I've been following this campaign, and the major issues that led UK voters to want to leave the EU are two you didn't mention:

1) The flood of "Syrian" refugees, who are both overwhelming the welfare states and creating a huge sexual-assault problem in one host country after another. The EU refuses to allow any member country to close its borders against them, and many members won't even allow news coverage of the problem lest profiling take place.

2) The ongoing huge cost to bail out Greece and the other spendthrift member countries, which has already cost German and British taxpayers heavily (despite the treaty that set up the Euro, which outlawed any such bailouts). Since the EU leadership don't have the spine to expel anybody, the Union will certainly drag down to ruin any country that stays in it.

Problem 1 affects the whole Union, and problem 2 affects all the non-spendthrift members (if there truly are any other than Germany and Britain), so I expect many more countries to run for the exit while they still can!

Peter said...

Are there any good and simple arguments for why tariffs are more damaging than other taxes, like income taxes for example?

Antisthenes said...

The UK holds the trump cards when it comes to a deal with the EU on trade. The EU exports more to the UK than the UK exports to the EU (even trade going through Holland for onward transit to non EU counties is counted as exports to the EU so even less than is assumed). On trade 3 million UK jobs are at risk but 5.5 millions EU jobs are at risk and they already have an unemployment problem.So unless the EU is prepared to cut off it's nose to spite it's face (which it is probably daft enough to do) a sensible trade deal can easily be made.

David Friedman said...


I don't think there is any rigorous proof. But the usual purpose of a tariff isn't to collect revenue, it's to prevent imports that compete with domestic producers. If that is completely successful you have the dead weight burden of getting goods in a more expensive way and no tax revenue at all. Short of that, a tax designed to prevent the activity being taxed is likely to do so more successfully than a tax designed to collect income while preventing as little activity as possible.

Anonymous said...

I've had thoughts along similar lines: that surely the coalition of pro-free-trade Brexiteers plus the 48% who voted Remain would collectively overwhelm the small group who really do want the UK to be more autarkic.

The most interesting serious threat to that, I think, would be for the Left to turn around and decide that, if Brexit must happen, they may as well make the best of it and take the opportunity to establish some tariffs and immigration restrictions, protecting those poor working class miners in the North who were ravaged by Thatcher and are still being further ravaged by free immigration and free trade, which benefits the fat cats in London but only hurts everyone else (or so the story goes).

The historical precedent for this seems obvious. Actually it's been kind of strange to see the Left argue for the benefits of free trade at all.

Another reason this could happen would be that the Remain group might prefer to be vindicated by seeing Brexit turn out badly, than to have the policies they argued for mostly rescued but under the banner of their opponents.

Max said...

From the point of view of multi-national business, "extensive regulation" is deregulation, since it's more valuable to have uniform regulation than to have slightly less regulation in one country.

Dick White said...

Is it required that free trade have a free trade agreement/treaty? David's post seems to suggest that Hong Kong simply declared that they were open for business, as it were---no restrictions. In such a case is there some administrative requirement for an "agreement"? If not, it does seem that these agreements are completely driven by the respective partners seeking to protect various products/industries from completion.

Ben said...

I had a discussion with an African economist about the recent rejection by Tanzania of a trade deal with the EU. He informed me that part of the reason is indeed the extra income to government from maintaining tariffs on foreign imports.
In the short term, while foreign imports are high because local production is low, the government can spend the income from import tariffs on projects such as building roads to encourage the growth of local industry. As local industry grows, foreign imports decline since they are more expensive, and the government no longer needs the extra income to support local industry.
Of course this still means that Tanzanians are paying more than they would without the import tariffs, but perhaps the Government hopes that at some point their own industries would be able to compete with foreign imports on a level playing field.

Unknown said...

@Ben in doing so at the same time your subsidizing industries while keeping their competitor out of the way. The two actions combine produce weak industries who won't be able to stay in the market without subsidies, and who are inefficient and obsolete because of lack of competition.

Unknown said...

(I'm sorry, *you're subsidizing* *two actions combined*)

Ben said...

@Francesco Also without a trade deal they have less income from exports, and so less money with which to buy the things they need to build up their industries.