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07 December 2016

LEADER OF THE FREE (TRADE) WORLD


Open to the World

Is Britain about to become the leader of the world in free trade? Some think so, some have said so. Where does this talk of world leader really lead?

However many trade agreements you may sign, you must have product to trade to benefit from the agreements. This article questions whether hype about trade agreements distracts from what really matters, and that is to develop the economy to meet our rapidly changing world, not just in terms of growth (which is frequently voiced) but also of quality.

Free Trade

Let’s start by thinking about free trade. Poldark thinks it is about smuggling French brandy by sea into Cornwall in the nineteenth century? Or is it about being first in line to sign an agreement with Donald Trump’s America? The European Union sees free trade as including free movement of labour and more, so to compete freely there should be harmony of tax, regulation, currency etc. Perhaps free trade just means bilateral reduction of tariff barriers, quotas and product regulation, or is an unspecific notion to strive for: free trade means free trade.

Sign 'em all up

Britain’s post-EU objective seems to be to sign many trade agreements and become the global leader in free trade. A trade agreement introduces freedom within the confines of its counter-parties, even if it excludes everyone else to the detriment of free trade. A third party is put at a competitive disadvantage by the exclusive arrangement. That this approach enhances free trade requires acceptance that many free trade agreements, though restrictive individually, lead to more free trade collectively.

Once you have your agreements, each party should have something to trade that is of interest to the other party specifically: my ball bearings for your herrings. A trade agreement is per se a bureaucratic construct that does not in itself give rise to trade but takes away restrictions that may inhibit it, although only for the trade flows specific to the agreement’s counter-parties.

Comparative Advantage

But how useful will it prove to be to look at trade with limited counter-parties by way of one-off agreements? In the global economy comparative advantage has taken on a dominant role in determining trade flows and economic roles. Comparative advantage is no longer just geographic but has other layers when products themselves have multiple geographic origins, one of the reasons why trade agreements are more likely to be effective with multiple parties, covering a wide range of geographies and products. Trade has moved away from barter, which is limited in its use, and this analogy may be appropriate here. Establishing trading zones is a way of resolving the bilateral problem.

A Better Mousetrap

Actually, the US patent office has approved several thousand different mousetraps, which undermines this stock phrase for innovation, but the idea is clear: markets will buy a great product, often leap-frogging barriers. Britain has had many good mousetraps since the industrial revolution, a recent one being the world financial centre of the City of London. British industry developed a fine mousetrap with the jet engine. Such successes are not the result of agreements negotiated by civil servants. These, the agreements not the servants, become a hygiene factor: they help the product once it is there but were not essential to its inception.

Up and Away

Britain introduced the industrial revolution to a highly restrictive and regulated world. The economic product was simply overwhelming and irresistible. Subsequent waves of innovation include transport (shipping, railways, aircraft), modern manufacturing methods, industrialised agriculture and food processing, computerisation, the Internet. These are the things that lead economic activity and trade, which today has grown to a global scale crossing national boundaries.

From today’s global perspective, it is hard to see how an individual nation (other than the US or China) will become ‘the global leader in free trade’. This is not to deny that Britain is in a position where it is obliged to invest time, money and effort in its trade arrangements: it certainly must to escape isolation. This simply has to be done, like breathing. The real topics for debate are how to develop the nascent strengths of the manufacturing base, the service sector and those huge successes that are leading the way in accounting, banking, insurance, software development, and all it takes to do this. Many believe us to be on the doorstep of a dynamic era resulting from an accelerating rate of change that is there for those who gear up to grasp it, a phase change. Perhaps real leadership can arise from the endeavour to become the best place to do business, and the world will beat a path to your door. Proud leaders of an open economy.

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