If Only Spiked’s Phil Mullan Understood The Economics Of Trade

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Trade’s not important we’re told, the trading arrangements after Brexit make little difference, be cool bro’. While the be cool injunction is fair enough that’s not actually how the economics of trade do work out. Trade’s actually vitally important for the very reason Mullan gives us that it’s not.

Which is pretty good going even for someone at a place as contrarian as Spiked.

Tariffs are a distraction
It isn’t trade that drives growth and prosperity.

That’s a logical error to start with.

Trade is not a fundamental driver of economic growth and prosperity, as is so often claimed. A country’s economic dynamic is predominantly homegrown, and expresses the condition of domestic production. Our economic future is determined not by trade levels, but by how we act or don’t act at home to transform the economic fundamentals – in particular, how we remove barriers to business investment and encourage more technological change and innovation across the economy.

The logical error being that that’s all trade. You and I swapping stuff is trade. There’s no logical nor economic difference between our doing so on the same side of a border or on opposite sides of a line drawn on the map. It’s all trade and it’s all wealth producing. We do generally term this “Smithian” growth but then Smithian growth is the major but not only contributor to such.

But then it goes seriously awry:

Trading success reflects the international competitiveness that derives from the relative productivity in the making of goods and services. It is not, as many seem to be suggesting, the other way around. Strong businesses export more, and have often secured favourable import terms for some of their supplies. Feeble zombie businesses are usually unable to do either. Trade policy is also much less important for a country’s economic health than measures its government takes to boost, or undermine, domestic productivity. A post-Brexit Britain could pursue the most progressive, liberalising trade agreements in history, but that alone wouldn’t fix our anaemic economy.

No. A major effect, in fact the major long term effect, of free trade is that it improves domestic productivity.

Sure, it’s nice when people export because that means there’s some foreign currency around with which we can buy stuff made by foreigners. But it is the point of the trade, to get the cash to buy the imports, which is important. Similalry, it’s the imports part of trade which increases the efficiency of the local producers.

Or:

Protectionists tell us that trade produces competition for domestic producers— something they must be, well, protected against. People who actually understand trade say that it produces competition for domestic producers which there should not be protection against. A new paper from two University of Nottingham academics points out just how much this is true, just how much this makes us richer. The important line of which is: The average growth rate, which in our economy corresponds to the growth rate of productivity, is 0.74 percent in autarky and 1.24 per cent under trade.” Over time, the authors point out, the difference between those two growth rates is a 50 percent uplift in standards of living.

And:

All of the above is well known enough in the economics of trade that it’s something that even the Treasury’s report on the effects of Brexit managed to get right. In the short term more trade just lowers the cost of things directly, in the medium to longer term it’s the effect upon domestic productivity which matters most in making us all richer. The net result of this is to turn the standard protectionist argument upon its head. Protectionists would have you believe that domestic firms would be helpless against those viciously efficient foreigners, so we must have trade barriers to stop that pressure. But it’s actually that competition from viciously efficient competitors which drives up productivity and thus increases living standards. If domestic productivity is low, or lower than foreign, that is exactly the reason not to put up protective barriers. It’s only under outside pressure that our own producers up their game.

The reason to have free trade is precisely its effects upon domestic productivity. People either shape up or go bust, that’s the point of it all.

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