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Daniel Hannan is an MEP for South-East England, and a journalist, author and broadcaster. His most recent book is What Next: How to Get the Best from Brexit.

It doesn’t much matter whether Britain secures any trade deals, provided it pursues trade liberalisation. The purpose of a trade deal is to remove, or at least reduce, the barriers that governments place between businesses and their customers. That task can be accomplished domestically, without needing the agreement of other countries.

A trade deal can still be valuable, of course. A world in which other countries also remove their barriers is a better world, for us as well as for them. A trade accord between two states makes it harder for a protectionist government to backslide – though not impossible, as Donald Trump is currently demonstrating vis-à-vis Nafta. Mechanisms to maintain the free flow of goods and services, including dispute resolution panels, are worth having. But none of these things will add anything like as much to the competitiveness and wealth of an economy as a domestic programme of liberalisation.

I realise that what I have just written will strike some readers as implausible – although it is pretty mainstream thinking among free-market economists. Many non-economists think that a country’s wealth depends upon its exports. It has to sell things, they believe, in order to pay its way in the world. They therefore celebrate when their country has a trade surplus, and fret when it has a trade deficit.

These assumptions seem reasonable, but they are wrong. What drives economic growth is not exports, but lower prices. When goods and services become cheaper, people no longer have to work such long hours to sustain the same standard of living. This frees up their time to do other things. Advances in agriculture in the18th century, allowing the same yield to be produced with fewer man-hours, made possible the industrial revolution. As prices of manufactured goods also fell, new services industries began to spring up, catering to demands that had previously not existed. Continuing advances in automation and AI are still pushing down prices and raising living standards while – despite all the panicky headlines – creating record numbers of jobs.

This process happens fastest in the countries that open their economies to goods and products from abroad. Two outstanding examples in the 20th century were Hong Kong and Singapore, resource-free islands that had to buy in almost everything they consumed – electricity, food, even drinking water. Both were transformed in a short time into gleaming city states. How? Largely through a policy of unilateral trade liberalisation. They removed their tariffs and other barriers unconditionally, not caring whether their trading partners reciprocated, nor whether they produced some goods at a subsidised rate. If Japan wanted to dump artificially cheap rice on Hong Kong, Hong Kongers were glad to accept what was effectively a gift from Japanese taxpayers. Both Hong Kong and Singapore became financial centres, not by securing preferential access to overseas markets for their banks, let alone joining customs unions, but by providing a legal and fiscal environment that encouraged enterprise.

Neither worried about the balance of trade. Indeed, Sir John Cowperthwaite, the Scottish civil servant who was the author of Hong Kong’s economic miracle in the 1960s, discouraged the compilation of official statistics. People would only put them to some damnfool use, he used to say. He understood, as most economists do, that the balance of trade doesn’t matter, because any deficit must be matched by inward investment, any surplus by outgoing capital.

He also understood, though, that this was a counterintuitive notion, at least with regard to national economies. In our personal lives, it doesn’t bother us nearly so much. I’m guessing that you run a deficit with your supermarket. When it cuts its prices further, does that harm you? If it dumps a surplus on you – promoting artificially cheap goods as part of some special offer – who gets the better end of the deal?

Once you come to see that cheaper imports, rather than easier exports, are the big win, your attitude shifts. We should aim to have as deep and comprehensive a trade deal with the EU as possible. But, if we can’t get one, we can secure most of the benefits simply by continuing to accept EU exports without restriction. (The various Treasury models suggesting that it would be catastrophic not to have a trade deal made the idiotic assumption that Britain would suddenly start applying tariffs to EU food, textiles and other goods.) Outside the EU, we can pursue a similarly open attitude toward everyone else, becoming more competitive by lowering prices.

Wouldn’t that “decimate our industry”, to use the #FBPE cliché of the moment? No. It would – like every other reduction in trade barriers, from the repeal of the Corn Laws onwards – lead to an increase in productivity.

It is true that, within an economy that is growing overall, free trade might accelerate certain sectoral shifts. Some industries decline while others grow, though that process is primarily driven by technology rather than trade. Outside the EU’s tariff arrangements, for example, we might buy cheaper steel, hugely benefiting our car and construction industries as well as our consumers. There would, though, be a cost to our steel industry.

If we want to continue to privilege steel over cars, construction and the rest, that is our choice. But it would be far cheaper to do so through a subsidy than through trade distortions.

To repeat, trade deals are worth having if they are about liberalisation rather than standardisation. I am in the United States now, talking about what the optimum US-UK arrangement would look like. When your negotiating partner also understands that the key benefit is lower prices, trade talks become very easy. Australia and New Zealand, for example, have followed Singapore and Hong Kong. Their trade deal with each other is arguably the best on the planet, providing for complete mutual recognition, including in services and professional qualifications. I’m guessing that our talks with them could be completed in a matter of weeks.

Elsewhere, there is an element of play-acting. Even when the negotiators grasp that the main objective is to open their own markets, they know that the deal has to be sold to voters who take a more mercantilist view. Liberalising measures which are desirable in themselves are therefore portrayed, for public consumption, as a sort of quid pro quo, balanced by an opening of the other party’s markets.

Which category is the EU in? It certainly has its producer interests and cartels. Indeed, its slowness in negotiating trade deals was one of the Leave campaign’s arguments. But its talks with the UK are unique in that the two parties are beginning from a position of zero tariffs and regulatory equivalence, meaning that, for once, the status quo bias will pull toward free trade.

In any event, Britain should prepare to follow a New Zealand strategy of maximum trade openness. Yes, we should strike reciprocal deals where possible. Yes, we should negotiate mutual recognition of standards and regulations. But we shouldn’t make our liberalisation depend on these things. If other countries want to impoverish themselves through protectionism, that is their tragedy. Let’s not make it ours.

277 comments for: Daniel Hannan: Trade liberalisation, even more than trade deals, is the true prize to pursue

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