Free trade: Why who gets the losses and gains makes it hard to defend

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August 3, 2017 by Paul Goldsmith

tyres

During his inauguration speech, Donald Trump made the case for instituting protectionist measures against free trade by claiming that ‘protection brings great prosperity and strength’. In amongst the immediate reaction to his speech, there was little proper attempts by our political class to explain to the British public why Trump was wrong. This is because the last time the UK had its own trade policy was 45 years ago. Because of that there is a shortage of people in this country able and willing to make a persuasive case against protectionism. As the country prepares for Brexit,  and the option of reducing the protectionist nature of our trade relationships with the outside world, there needs to be proper intellectual work done on how to make that case, or the public relations battle will be lost very early.

The reason for this that the losses that free trade occurs are concentrated on a small number of producers, all of whom have already proven they are highly organised and ready to protest against these losses. Meanwhile, the gains from free trade are distributed widely amongst a great number of consumers. They could benefit from greater choice and lower prices, but these consumers do not have anywhere near the organisation and resources to secure these gains. Last week’s scare stories about ‘chlorinated chicken’ show how this is going to work. But last year’s outcry over the inability of the steel plant in Port Talbot to compete globally is another example.

Put crudely, let’s say there is a trade deal that allows cheaper chicken into the country. The country’s top 100 chicken producers may lose £1m a year because of this. But 30 million people in the country may gain £10 from it through cheaper food. That’s £100 losses for producers, £300m gains for consumers. Who will dominate the media? Well, last week showed us that.

This is not a hypothetical example. Lets look at what happened in the USA when President Obama imposed tariffs on tyres to combat the lower prices coming from China. A study found that this potentially saved 1,200 jobs. This is good, right? But the cost to US consumers due to higher tyre prices was $1.1bn, which means each job saved cost $900,000. Then there is the reduction of consumer spending power in order to buy other goods and services as a result of this. I would be prepared to bet that Obama’s protectionist measure destroyed more jobs than it saved.

Free trade is often portrayed as producers against consumers. But it is not as simple as that. Certain producers lose out through free trade, and attempts to protect them can then mean whilst they might gain, many other producers, let alone consumers, lose out. This is because many producers are consumers.  If for instance the steel industry persuades the Government to protect them, anyone that produces cars and machines for instance will see their exports reduce as the price of their inputs increases, meaning their prices have to increase.  It isn’t just consumers with less money to spend, it is producers with less money to spend hiring and paying employees. Employees are also consumers…..and so on.

So, as Brexit possibly free Britain to make its own trade deals, it is important to look at the battles against those deals within this country from a ‘distributive’ or ‘stakeholder’ point of view. Losses are concentrated, gains are diffuse. Many of those who lose will protect their interests, and you should always look into the source of complaints about it.

That doesn’t mean concerns about falling standards of goods and services, or falling standards of employment conditions, falling wages and the outcomes of falls in taxes to encourage foreign direct investment shouldn’t be listened to. It doesn’t mean that concerns over the effect of a town or village’s one major source of income (a factory or a farm for instance) should be ignored or not acted upon. It just means that before the knee-jerk political temptation to use protectionism is invoked some thought is used first.

 

 

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One thought on “Free trade: Why who gets the losses and gains makes it hard to defend

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