It is a great pleasure to speak at today’s event and to celebrate the virtues of free trade and the publication of David Ricardo’s Principles of Political Economy and Taxation.
At first sight, I am somewhat straying from my usual responsibilities as Secretary of State for Work and Pensions in addressing this subject. Indeed, when Dan asked me to speak at this event, I was initially hesitant. However, for these reasons, I was keen to participate.
First, as a long-standing advocate for free trade, I was keen to make the case at such a crucial turning point for the country.
Second, and this is the essence of my argument today, is that free trade – as one of the most effective forces for alleviating poverty known to humanity – is one of the great progressive causes.
It is, therefore, no coincidence that the history of free trade and the history of governments’ attempts to support the poor are so intertwined. Today, we celebrate David Ricardo’s contribution to free trade. But as Chris Renwick’s recent history of the origins of the welfare state, Bread for All, sets out, Ricardo was also a leading voice in reforms of the poor law.
Robert Peel’s conversion to the cause of free trade was as a result of the realisation of the impact of protectionism on the poor or, as he described them, the labouring classes.
Moving to the twentieth century, the early dominance of the Liberal Party was based upon twin commitments to protect the poor from the consequences of tariffs – with the support of former Conservatives such as Winston Churchill – plus strengthening welfare support.
And when the Liberals faded they were replaced as the ‘workers party’ by a Labour Party just as committed to free trade. That party’s first Chancellor, Philip Snowden, was the last minister to resign from office on the principle of supporting free trade. He is remembered for his commitment to free trade and sound money and, as a consequence, is more venerated within Her Majesty’s Treasury than Her Majesty’s Opposition.
The economic case for free trade is a familiar one. The free exchange of goods and services benefits both parties. The larger the market, the greater the opportunity to specialise in an area of comparative advantage resulting in increased choice for consumers, increased competition amongst producers, and a more efficient allocation of resources. People, businesses and countries do what they are comparatively good at and stop doing what they are comparatively bad at. As a consequence, productivity rises and, with that, living standards. There are few economic doctrines that have the breadth of support amongst economists that applies to free trade.
The response to this is to say that this may well be the case but that the benefits and disbenefits of free trade are not evenly distributed. True. But, by and large, the beneficiaries of free trade have more often been the poor. That is certainly the case when looking at this matter at a global level where recent decades have seen an almost miraculous fall in absolute poverty around the world as countries such as China and India have liberalised their economies.
But it is also the case that the poor have benefitted from free trade in our own history. This is largely because the poor spend a greater proportion of their income, and spend it on items which may be imported – particularly food. And this is why, as my earlier comments suggest, those most effective in furthering the interests of the poor – whether Conservative, Liberal or Labour – have, by and large, been strong supporters of free trade.
And it remains the case that free trade is as much, if not more, in the interests of the poorest in society as the richest. Let me give one illustration. According to the IFS, the poorest income decile in the UK spends 23 percent of their income on food. The highest earning decile spends just 10 percent. Consequently, reduced food tariffs would disproportionately benefit the poor, increased food tariffs would disproportionately cost the poor.
It is all the more important to make these arguments in favour of free trade now, for two reasons. First, as we have seen in recent years, arguments that were once seen to have been resolved are now being re-opened. Just because an idea works in principle and then works in practice does not mean that it won’t be challenged, undermined and, ultimately, abandoned by politicians tapping into populist mistrust. If you believe in free trade, you have to argue for it.
Second, it is now more important than ever that, within the UK, we make the argument for free trade because, following our departure from the European Union, we will determine our own trade policy. That should enable us to pursue policies that enable us to be a beacon for free trade. But we should also be aware that there are some who will seize the opportunity of Brexit to make our economy less open. When Jeremy Corbyn talks of taking advantage of the new flexibilities that leaving the single market will bring, he is not, I suspect, thinking about ambitious new trade deals with the rising economies.
I take heart from the Brexit campaign. The leading voices on both sides set out arguments that differed on how to achieve greater free trade; neither side challenged the desirability of free trade.
Those of us who were on the Remain side argued that the single market was a means of reducing non-tariff barriers within the European Union. The leading leavers – such as Dan Hannan, Boris Johnson, Liam Fox and Michael Gove – argued that the European Union had held us back from entering into free trade agreements with many of the rising economies.
In other words, it was a debate that accepted economic openness as an objective but differed as to the means of delivering that objective.
Of course, the British people concluded that we should leave the European Union. The question is now how we do it and, for the purposes of this gathering, how we do so in accordance with a desire to be a beacon for free trade.
So now, more than ever, it is important that we make the case for free trade. What are the challenges that we face? What are the misconceptions that we need to address?
First, we need to understand what free trade means. Free trade, as advocated by Adam Smith and David Ricardo and other classical economists, means the ability to both import and export. But the purpose of free trade is to improve the lot of the consumer. Or to put it another way, free trade enables us to consume more by accessing goods and services more cheaply than would otherwise be the case. Of course, an economy may need to export goods and services in order to afford to purchase imports – and as a country the UK does need to export more as a source of economic growth. But we should remember that the case for free trade made by the likes of Smith and Ricardo was not a criticism of autarky but a criticism of mercantilism.
Mercantilism essentially argued that the point of trade was to create jobs for exporters. In other words, it viewed trade from the perspective of the producer not the consumer. This resulted in an approach whereby exports were seen as good, imports bad. A country made a profit on the former, a loss on the latter. It wasn’t anti-trade, as such, indeed mercantilism was positively enthusiastic about exports. But it provides no intellectual bulwark against trade barriers to protect domestic producers and, therefore, pressures us towards protectionist measures.
Mercantilism may be intellectually discredited but it is remarkably persistent in its influence. There is something about mercantilism which ‘feels’ right. What Stephen Pinker would describe as ‘intuitive economics’. But it would be a profound mistake to pursue a trade policy that does not put the consumer first. That is why, in my view, the progressive case for free trade needs to be articulated strongly.
Second, any discussion about trade barriers will begin with tariffs. But it doesn’t end there. Tariffs may be the most obvious and comprehensible form of trade barrier but it is increasingly the case that non-tariff barriers matter more. This is, in part, because tariffs have generally fallen under WTO rules in recent years. But other factors have also changed the relative importance of tariff versus non-tariff barriers. Cross-border supply chains require an ability to move goods quickly from one country to another. This means that time barriers rather than tariff barriers can be critical.
When it comes to services, regulatory requirements are of more consequence than tariffs. They are difficult to estimate because they are not always visible. But they still matter.
Given that opening up trade is increasingly about non-tariff barriers, this brings me to my third point. Free trade agreements are more complex than they once were. It is no longer the case of a discussion along the lines of ‘we will remove our tariffs if you remove yours’. Such a negotiation was, in any case, somewhat mercantilist and could be described as being ‘we will stop disadvantaging our consumers if you stop disadvantaging your consumers’. But at least it had the virtue of being simple enough that it could be resolved quickly.
Now a negotiation will cover issues of consumer protection, environmental standards and the recognition of professional qualifications. From the perspective of maximising trade, one would want to minimise the degree to which different approaches in different countries prevents goods and services trading freely. Balancing that with a sovereign nation’s desire to establish its own regulatory regime for such matters is not a simple task.
Nor is it insuperable. But my fourth point is that opposition to free trade will not necessarily be presented as a case for protectionism. Other justifications will be found.
Let me give a recent example. A bogus case that the Trans-Atlantic Trade and Investment Partnership – ‘TTIP’ – would result in the privatisation of the NHS was used by the anti-globalisation Left (and then taken up by others) to oppose what would have been a major breakthrough in free trade.
This is nothing new. At the risk of upsetting our American friends, historians have argued that the participants in the Boston tea party were more concerned about preventing cheap imports of tea than the principle of ‘no taxation without representation’.
And there are, after all, legitimate reasons why a country might have, for example, different food safety standards than another and seek to apply those standards to imports from that other country. The test of a regulation is whether the regulation is, in intent and effect, proportionate and relevant to its stated objective – such as food safety – as opposed to protecting the interests of domestic producers from better value competition.
And this brings me to my fifth and final observation about free trade. In terms of engagement with the outside world in the context of trade negotiations, our approach should be constructive and co-operative. Trade is not a zero-sum game. Where trade barriers are removed, this has overall benefits and a willingness to be open – whether through, for example, agreeing common standards or by recognising the regulations of other jurisdictions as being of equivalent standard, we can improve the welfare of our citizens.
So, in summary, what should be the approach of a country, such as the UK, seeking to be a beacon of free trade?
We should encourage trade – imports as well as exports.
We should be determined to address non-tariff barriers as well as tariff barriers.
We should recognise that free trade agreements are complex. But this should not put us off.
We should be wary of arguments that are not presented as a case for protectionism but, in reality, will be just that.
And our engagement with other countries should be positive, recognising the benefits that trade can bring, and constructive in addressing differences in regulations and standards, whilst still maintaining important consumer protections.
In the context of the negotiations with the European Union, the approach set out by the Prime Minister in her Florence speech is the right one. We want to minimise new trade barriers with the EU, which means that an implementation period followed by a deep and special partnership with the EU 27. But that we also need the ability to enter into new agreements with other countries so that we can go further to reduce trade barriers with countries outside the EU that represent a growing share of the world economy.
There is also another point that the Prime Minister, and Liam Fox as Secretary of State for International Trade, have consistently made. In our new circumstances, the UK must become a beacon for free trade. We must argue our case, and demonstrate to the rest of the world, that it is an approach that serves us all well.
I have focussed on economic matters today. The economic case is a strong one. And, as I have argued, the benefits of free trade are particularly significant for the poorest in society. It is a point too often missed in a debate in which the concentrated and organised voices of producers can be louder than the disbursed voices of consumers. Free trade is good economics and good economics should make good politics.
But in making the case for free trade, we should have confidence not just in the economic arguments. A belief in free trade is an essentially optimistic, generous and outward-looking approach. It sees foreigners not as potential enemies but as potential customers and suppliers. It brings people of different nations together not on the basis of the imposition of top-down political structures but organically on the basis of the mutual benefit involved in the free exchange of goods and services. It expands our moral circle.
Free trade is a great cause. It was a great cause 200 years ago and it is a great cause today. It falls on us to make that case again.
This speech was delivered at New Direction’s working lunch “A Free Trading Europe” on 16 October, 2017.
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