Thursday 23 February 2017 4:59 am

Unilateral free trade: The selfless Brexit policy that is best for everyone

There is a clear ethical choice at the heart of trade policy, with direct implications for Brexit. The choice is between selfish, self-interested or selfless policies. And the counter-intuitive truth is that it is selfless policies that maximise prosperity in the long term.

So what is meant by selfish, self-interested and selfless?

Selfish policies are protectionism, where tariff and non-tariff barriers are deliberately imposed on other countries to reduce their competitiveness when selling to the UK. Such policies are selfish because they protect domestic UK producers at the expense of overseas producers selling into the UK. As with all forms of selfish behaviour, a temporary gain always leads to pain, because tariff and non-tariff barriers are self-defeating.

Barriers mean that UK consumers pay more for imported goods. Barriers also mean that in the long term there is reduced competitive pressure on UK producers, which become less efficient, with productivity and incomes commensurately lower. “Beggar thy neighbour” doesn’t damage the neighbour alone.

What about self-interested trade policy? Self-interest can be good or bad. It is good if it results, say, in a free trade agreement, which opens up domestic and overseas markets to more competition, but it is bad if it involves tit-for-tat retaliation, with the protectionist consequences above for consumers and producers in the short and long term.

To use a Biblical analogy, an eye for an eye and a tooth for a tooth is not the best policy. If someone strikes you on the right cheek, turn to him the other also.

The selfless option is genuine free trade, with zero tariff and non-tariff barriers. The protectionist wall currently surrounding the UK, in the form of the EU’s Common External Tariff, would be blown away. Genuine free trade is unilateral, because it is the right policy to pursue, even if other countries adopt protectionist measures against you.

At first glance, this is quite a difficult policy to understand. This is because the economic benefit from unilateral free trade is counter-intuitive. It involves inflicting short-term pain on producers in order to achieve a long-term gain. Significantly, consumers would be better off in both the short term (lower prices) and the long term (higher incomes).

People understand what you mean when you say protectionism. After all, the word itself implies protecting your economy from harm overseas. Surely, you ask, isn’t protectionism like defence? If you didn’t have an army you would be at the mercy of invasion by foreign powers. Just as an army protects the nation, surely tariff and non-tariff barriers protect an economy? No, they don’t. The truth is the exact opposite.

Tariff and non-tariff barriers undermine an economy. They’re like a painkiller that has the side effect of killing the patient – or at the very least of creating other medical problems.

The reason is that unilateral free trade facilitates a shift to operating at world prices. Trading at world prices provides a competitive kick to companies which have to be more productive in the absence of tariff and non-tariff barriers. The selfless policy imposes short-term pain in pursuit of long-term gain.

Stop, I hear you cry. Even if we think unilateralism is a good idea, shouldn’t we impose tariffs on the EU post-Brexit, as a bargaining chip in free trade negotiations? No we shouldn’t. If we impose sanctions on the EU, WTO rules mean that we must impose the same tariffs on everybody else too. This would undercut the benefits from trading at world prices, with zero tariff and non-tariff barriers.

Similarly, if the EU did put up the barriers, it would damage its own producers through the same static (price) and dynamic (productivity) effects discussed with regard to the UK. British and EU consumers simply don’t realise that getting out of the Customs Union would ensure lower prices in the short term and higher incomes in the long term. Selfless trade policy, the zero option, is best for all.