Mutual benefits of free trade recognised in UK-EU deal

UK Prime Minister Boris Johnson has had a big win with the just-in-time UK-EU trade deal, under which it appears the UK will retain access to the common market, with zero tariffs on “most goods” according to the Financial Times. While this can be seen as a huge win for Boris Johnson, partly it’s likely due to EU officials recognising the mutual benefits of free trade between nations.

When a country imposes a tariff, its own consumers and businesses end up paying it (although, in an impressive demonstration of his persuasive powers, President Trump was able to convince many Americans that tariffs on Chinese goods imported into the US would be paid by the Chinese). I should note that, if domestic substitutes to imported goods subject to tariffs are available, tariffs can boost domestic industries, but the protected industries can end up inefficient and unviable without ongoing tariff protection. Consumers and businesses pay higher prices than otherwise. That is what we ended up with in post-war Australia after decades of protection of our motor vehicle and textile, clothing, and footwear industries. Australian consumers are now much better off with cheaper cars and clothes in real terms as a result of successive governments since Bob Hawke’s (arguably, since Gough Whitlam’s) bringing down the once high tariff wall.

Probably the best recent description of the benefits of free trade was provided by federal MP Dr Andrew Leigh in his Lowy Institute paper Choosing Openness, which I attended the Brisbane launch of in 2017 and subsequently reviewed on QEW: Andrew Leigh’s Choosing Openness – highly recommended reading. In the paper, Andrew nicely summarises the benefits of lower tariffs for Australian consumers (on p. 40):

Looking at the prices of a standard basket of goods, the Australian Bureau of Statistics estimates that average prices have risen by 140 per cent since 1987. But the statistical boffins calculate that the average price of shoes has not risen at all, while the price of cars has risen by just 10 per cent. Sellers of shoes and cars could use price stickers from the 1980s and they would still be roughly right.

Andrew also notes the wider variety of products, especially cars, available to Australian consumers since we tore down the tariff wall. And, as Andrew reminds us, the benefits of free trade occur even if your trading partner doesn’t reciprocate:

As economist Joan Robinson once put it, even if your trading partner dumps rocks in their harbour, you do not become better off by dumping rocks in your own harbour.

EU officials appear to understand the mutual economic benefits of free trade, to the considerable political benefit of Boris Johnson, who now needs to devote his full attention to the current COVID crisis in the UK.

UK Prime Minister Boris Johnson. Official photo by Ben Shread / Cabinet Office, OGL 3, https://commons.wikimedia.org/w/index.php?curid=83764351

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