by John Brian Shannon | January 17, 2017
Prime Minister Theresa May says that Britain must be a free trading nation to boost the UK economy and to better serve the aspirations of millions of Britons.
And Britain’s leader is correct, as history has proven that free trading nations outperform non-free-trading nations. From the seafaring Phoenicians of classical antiquity to the former British colony that became a superpower called the United States of America; Free trade and hard work have built our shared civilization, and any country that withdrew from free trade or liberalized trade agreements, consequently declined.
READ: Between Free Trade and Protectionism: Strategic Trade Policy and a Theory of Corporate Trade Demands by Helen V. Milner and David B. Yoffie | Published by MIT Press
That’s not to say that other economic practices don’t have merit, because they do. However, a group of non-free-trade nations will always be surpassed by a comparable group of free trade nations — due to the symbiotic nature of free trading relationships which produce small but measurable amounts of synergy that accumulate over time.
It’s the easier access to raw materials, the lower labour costs, and the ability to access larger export markets that make free trade work so well, but the ‘icing on the cake’ is the synergy produced by the symbiotic relationships which aggregate and thereby increase corporate profits and investor dividends that are often reinvested in the growing corporation. Over time, all this synergistic activity results in far greater outcomes than otherwise would’ve been the case.
A perceived problem occurs when vast disparities are present, such as when one nation is blessed with abundant raw resources allowing it to basically dig money out of the ground which eventually accumulates into billions or even trillions of dollars, while another country in the same trading bloc may have few natural resources.
As long as all partners within the trading bloc have equal access to those raw resources, such problems are likely to be nothing more than minor jealousies.
Countries like the United States, Canada, Norway, Saudi Arabia and the United Arab Emirates have vast petroleum reserves, and importantly, good economic stewardship — which allowed them both rapid growth for the economy and a high standard of living for their citizens. It’s telling to note they are free trading nations — while other countries blessed with large petroleum reserves but restrictive international trading arrangements, haven’t prospered. Venezuela (the country with the world’s largest proved oil reserves) along with Libya and Nigeria, have poorer development due to their historically somewhat less than free trade practices. For economists, those nations serve as a warning to politicians considering the adoption of less liberal trade policies or outright protectionism.
Such disparities between nations, unless handled carefully, can result in explosive economic and political consequences.
READ: What does Free Trade mean? | Investopedia
Globalization: Lower-priced goods, but fewer jobs
It’s easy for some to forget that free trade and globalization are two different things. Free trade relates to the removal of tariffs, or at least the standardization of low tariff rates between member nations of the same trading bloc, while globalization refers to a highly interconnected political and economic world of which trade of any kind, whether free or not, is merely part of a large picture.
Those who feel left behind by globalization (and there are millions) tend to blame free trade, when in fact it was free trade that created a booming global economy from 1982 through 2007 (and a somewhat less booming economy) from 2012 through 2016.
Led by global elites, the rush to create high growth and high GDP meant that quality of life fell steeply for millions of Westerners for the first time since WWII due to the offshoring of Western jobs to countries with lower labour costs and non-existent environmental regulations.
READ: You Can’t Feed a Family With G.D.P. | New York Times
It’s Not All Bad
Westerners have enjoyed unprecedented low-cost, quality goods manufactured in other countries.
Two examples of this are; 1) the Apple iPhone, which, if manufactured in the United States would have cost $2800. each, instead of the typical $650.-$950. price range. The iPhone wouldn’t have ever seen production if it hadn’t been manufactured in Asia. Over one billion have been sold since the first iPhone hit the market. And; 2) almost every computer chip in the world was manufactured in Taiwan, an industrious country with a very diligent workforce, but few natural resources. Computer chips have cost an average of $40. since Taiwan’s entry into the semi-conductor business, but if manufactured in the United States those chips would’ve cost hundreds of dollars each.
While low-cost goods are welcome in the West, people in the bottom quintiles now wish for a return to high paying employment and would gladly forego low-priced goods.
Which is exactly what the election of Donald Trump is all about. ‘Cheap goods are great, but we’d rather have jobs!’ — seems to be the main message there.
It’s difficult to blame those who harbour such resentments when 3/5ths of the population are doing less well, while only 2/5ths feel they have progressed in recent years.
Yet to blame the very free trade agreements that brought wealth to Western nations displays a lack of understanding of how globalization works vs. how free trade agreements work.
Free trade creates additional economic activity (with many virtuous cycles, which are always a good thing) while unrestricted globalization (under existing personal tax laws) rewards the top-two quintiles at the expense of the bottom-three quintiles. And it’s this fundamental misunderstanding which have people in an anti-free-trade mood — when instead, they should be protesting against global elites, unfettered globalization, and crass-and-uncaring politicians.
Had the global elites applied as much effort to ensuring that globalization worked for every economic quintile instead of the top-two quintiles exclusively, movements such as Occupy Wall Street along with the general disenchantment voiced by the public against politicians and economists wouldn’t have materialized. Ever.
When it works for everyone, there’s no complaining.
READ: In Defense of Globalization | Project Syndicate
Free Trade with a Standardized and Reciprocal Tariff Regime – Instead of Unfettered Globalization
PM Theresa May and Chancellor Philip Hammond should work to obtain a mutually-beneficial free trade agreement between all Commonwealth countries as part of a Tier 1 trade accord.
Such an agreement should ensure there are no tariffs, levies, nor other trade impediments — save for a highly standardized and reciprocal 5% tariff on all goods — except books (in any form) or those medicines that actually save lives, because principles do matter. A more educated and healthier Commonwealth are desirable outcomes. No VAT taxes or tariffs should be levied on books or life-saving medicines, ever. Anywhere on the planet, IMHO.
Why the 5% Tariff?
What the 5% tariff would do for all signatory countries is to pay for upgraded port facilities and enhanced security at ports, railways, and for cargo ships at sea.
Why the 10% Tariff?
A Tier 2 trade accord should be negotiated with nations that aren’t Commonwealth members with a standardized and reciprocal tariff of 10% — except for books and life-saving medicines which should be tariff-free and VAT-free in every case. As long as the trade partners agree to standardized and reciprocal tariffs, such tariffs won’t break WTO tariff rules. And such revenue could enhance port security, of course, but could also be used to pay for additional infrastructure programmes to put millions of workers back on the job.
Why the 25% Tariff?
Finally, a Tier 3 trading scheme could be created for those nations that won’t agree to a standardized list of tariffable items at a standardized and reciprocal rate, and won’t agree to not tariff books and life-saving medicines, and that tariff could be 25% on all imported items until the day arrives that country begins to abide by the Tier 2 trading rules.
In all three scenarios it puts the UK government firmly in the drivers’ seat in regards to imported goods and guides UK trading partners towards Tier 2, or even Tier 1 status.
The goal is to arrive at a situation whereby every nation willingly decides to join The Commonwealth in order to gain free trading status with the Commonwealth and agrees to a nominal, standardized, and reciprocal 5% tariff regime on every good except books and life-saving medicines.
It is still free trade, but with a nominal, built-in tariff designed to enhance port facilities and streamline security in all partner nations.
What to do with the revenue generated by such tariffs?
The main point is to upgrade existing port facilities, to increase security at Britain’s ports, and at reciprocal trade partner ports to ensure the security of ships at sea and the thousands of kilometres of rail lines that carry freight.
Any remaining tariff revenue could be used to soften the economic blows to those in the bottom-two quintiles who have suffered quite enough over the past 16 years.
Whether used to boost social welfare rates (good) or to boost national infrastructure spending (better) or both (best) it will be money well spent, and it would be revenue that arrived in the government hand via imported goods.
Which seems fitting, doesn’t it?