Trading Our Way to Wealth
Every voluntary trade makes both parties richer. The buyer values what they receive more than what they give up. The seller values what he or she receives more than what they give up. Nothing is created in a factory sense, yet wealth appears, because both sides end up holding something they prize more highly than what they started with. This is not a zero-sum shuffle of existing goods. It is the mechanism by which economies grow.
Britain's prosperity was built on this insight, applied on a global scale. The abolition of the Corn Laws in 1846 did not simply lower the price of bread. It signalled that Britain would build its wealth by selling what it made best and buying what others made best, rather than by sealing itself off behind tariff walls. The nineteenth century that followed was the most rapid period of wealth creation the world had yet seen.
The protectionist case always sounds plausible at first hearing. Foreign competition threatens domestic jobs, so keep foreign goods out and domestic jobs are safe. The flaw is that it looks only at the producers who are shielded and never at the far larger number of people who pay the cost.
A tariff on foreign steel protects steelworkers. It also raises the price of steel for every carmaker, shipbuilder, and construction firm in the country, and therefore raises the price of cars, ships, and buildings for everyone who buys them. The number of jobs saved in steel is always smaller than the number put at risk in the industries that use steel as an input, because protected industries become less competitive exporters and their customers face higher costs than rivals abroad.
Comparative advantage explains why this holds even when one country is better at making everything. What matters is not whether Britain can produce a good more cheaply in absolute terms, but what Britain gives up to produce it. A country should specialize in what it gives up least to produce, and trade for the rest. Ricardo demonstrated this with wine and cloth two centuries ago, and nothing since has overturned it. It is one of the few genuinely counter-intuitive truths in economics, and one of the best established.
The European Union's common external tariff illustrates the point precisely because it was built for the opposite purpose. Member states agreed a single tariff schedule applied to goods entering from outside the bloc, ranging from low single figures on many industrial inputs to double figures on agricultural products and over ten per cent on cars. The tariff was never primarily a revenue measure. It was a device to protect favoured domestic producers, above all French and other continental farmers, from cheaper food and goods from the rest of the world.
The result was dearer food for every household in the EU, dearer inputs for manufacturers who had to buy above the world price, and a permanent transfer of wealth from consumers to a politically protected minority of producers.
Studies of the common agricultural policy repeatedly found that the gains to farmers were smaller than the losses to consumers, because protection destroys wealth on the way through even as it redistributes what survives. A tariff wall protects the producers standing inside it and taxes everyone who has to buy from them.
Britain's departure from the customs union removed the obligation to apply that tariff schedule to trade with the rest of the world. What Britain does with that freedom determines whether Brexit becomes a source of wealth or a missed opportunity. Retaining EU-style tariffs by habit, or replacing them with new protections for chosen domestic industries, would throw away the prize while keeping the argument.
Unilateral tariff reduction is the single most direct route to wealth here. Britain does not need to wait for a reciprocal deal to lower its own tariffs, because the principal beneficiaries of a tariff cut are the country's own consumers and producers who use imported inputs. Waiting for other countries to reciprocate before cutting a tariff that harms your own people is like refusing to stop hitting yourself in the head until someone else agrees to stop hitting themselves.
Unilateral liberalization also strengthens Britain's hand in trade negotiations, since a country that can credibly walk away from a deal without losing access to cheap goods negotiates from a position of confidence rather than dependence.
Food and agricultural tariffs deserve particular attention. British households spend a meaningful share of their income on food, and inherited EU tariffs on products Britain does not itself produce in quantity serve no domestic industry while raising weekly bills. Removing tariffs on goods that compete with nothing British made raises no legitimate objection at all.
Services trade matters as much as goods, and Britain's advantage lies disproportionately in services: finance, insurance, law, consulting, education, and the creative industries. Non-tariff barriers, mutual recognition of qualifications, and data adequacy agreements do more for British wealth in these sectors than any tariff schedule, and deserve the same liberalizing instinct.
A country grows wealthy by producing what it produces best and trading for the rest, and every tariff that interrupts that process makes the country poorer than it would otherwise have been, whatever it does for the producers standing behind the wall.
Britain spent two centuries proving the case for free trade and one not applying it. The nineteenth century evidence has not changed. What has changed is Britain's freedom, since leaving the customs union, to choose which of those two centuries to repeat.
Madsen Pirie