In this column last week, I criticised President Trump’s trade policy, warning that it risked making US industry inefficient and uncompetitive (USA will increasingly mirror Russia in its economic decline and dishonest crony-capitalism.)
The attitude that underlies protectionist trade policy is all too common. It is the principle, after all, that underlies the EU’s customs union: a tariff wall to exclude or disadvantage trade with the outside world whilst promoting free trade amongst its own members. One might even go so far as to say that the EU provoked retaliatory tariffs from Trump, given the way that it penalised US manufactures and agricultural produce through its own tariffs and non-tariff barriers.
Worse still, for many years the EU subsidised its own agricultural produce through the Common Agricultural Policy, generating large surpluses, that were then dumped on world markets with devastating consequences for the earnings of less developed countries, whose only access to capital was dependent upon revenues from their own agricultural exports.
The ’exports=good and imports=bad’ approach to trade policy by ‘nationalist’ politicians’ is an ignorant throw-back to the Mercantilism of former centuries, which treated trade as almost a substitute for warfare, rather than a system of trade to mutual advantage.
A great economic power is not undermined by its reliance on imports. Even when Great Britain was the ‘workshop of the World’ following the Industrial Revolution, we ran a balance of trade deficit. The Cotton Industry, which was the engine of our economy, was reliant on a wholly imported raw product. This was compensated for, not just manufacturing, but by ‘invisibles’ in the form of shipping and the export of capital -such as financing the US railroad expansion.
Both Trump and his Vice-President are exercised over what they consider as the export of manufacturing jobs by US reliance on imports from overseas. But any calculation must recognise that it isn’t just about the jobs.
Obviously, if my climate doesn’t lend itself to growing desirable tropical fruit, I’m not sacrificing any domestic jobs by importing those fruits. However, Ricardo’s law of Comparative Advantage is rather more subtle: suppose I’m a highly skilled engineer and I employ a cleaner. Nevertheless, I reckon that I can clean more effectively and efficiently than my cleaner can. Should I stop exporting that jog to the cleaner and do my own cleaning?
Of course not, because, in the time that I give up to cleaning, I will have forgone the much higher earnings I could have earned using my engineering skills. The reality is that I don’t want the cleaner’s job even though I am better at it.
The same principle applies to an advanced economy: It should deploy its resources of land, labour and capital where it can do best and earn most -rather than incurring the opportunity cost of using some of them up to produce things of less value.
The UK doesn’t export a great deal of manufactured goods, but despite being a small Island our earnings from exporting manufactured goods are in the top ten internationally: our strength is at the high-tech end of precision manufacturing. So, the question is, given where our strength lies, should we be investing our very scarce capital and skilled resources into saving our steel making capacity, in a world where there is already a surplus, and where we haven’t made a success of it for decades?
Whatever the answer, its an important question to ask