When President Trump proposed zero trade barriers among major economies, I applauded. Government-imposed barriers to commerce hurt prosperity, whether those restrictions hinder voluntary exchange inside a country or across national borders.
There’s a debate over Trump’s sincerity, and I’m definitely with the skeptics (look at his supposed deal with Mexico, for instance), but let’s set that issue aside and investigate the merits of free trade.
But let’s go one step farther. Instead of looking at whether multiple nations should simultaneously eliminate trade barriers, let’s consider the case for unilateral free trade.
In other words, should the government abolish all tariffs, quotas, and other restrictions so that buying products from Rome, Italy, is as simple as buying products from Rome, Georgia.
The global evidence says yes, regardless of whether other countries do the same thing.
Consider the examples of Singapore, Macau, and Hong Kong. According to the World Trade Organization, trade barriers are virtually nonexistent in these jurisdictions.
Have they suffered?
Hardly. According to the World Bank, all three jurisdictions are among the most prosperous places on the planet. Indeed, if you removed oil sheikdoms and tax havens from the list, they would win the gold, silver, and bronze medals for prosperity.
To be sure, there are many reasons that Singapore, Macau, and Hong Kong are rich. They have low taxes and small government, as well as comparatively little red tape and intervention.
But free trade definitely helps to explain why these jurisdictions have become so rich at such a rapid pace.
Let’s also look at the example of New Zealand. It doesn’t have absolute free trade, but average tariffs are 2.02 percent, which means it is the world’s fifth-most pro-trade nation.
Have the Kiwis suffered from free trade?
Nope. I shared a remarkable video last year that explains the nation’s remarkable turnaround coincided with a period of unilateral trade liberalization.
Today, let’s look at a column on the same topic by Patrick Tyrrell.
New Zealand…is one of the champions of economic freedom around the world. But it wasn’t always so. In the mid-1980s, New Zealand was facing an economic crisis, with its domestic market and international trade
both heavily regulated. Unemployment had reached 11 percent… In response, the government of New Zealand began implementing revolutionary economic reforms, most significantly related to trade policy. It announced in 1987 a program that would reduce the tax on imports to under 20 percent by the year 1992. By 1996, that tax was reduced further to under 10 percent, and by the end of 1999, about 95 percent of New Zealand’s tariffs were set at zero.
Was that a successful policy?
Extremely beneficial.
New Zealand’s adoption of less restrictive trade policies has corresponded to its climb up the trade-freedom scale…and with
a huge boost in per capita gross domestic product. The United States could take a page out of New Zealand’s trade-policy book and implement the same type of reductions in tariffs… That would enhance innovation and economic freedom—and grow our economy.
Here’s the chart from Patrick’s column.
Once again, the obvious caveat applies. New Zealand has adopted many pro-market policies in recent decades, so trade is just one of the reasons the country has moved in the right direction.
Now let’s go back in history and peruse Professor Peter Cain’s analysis of what happened when the U.K. adopted unilateral free trade in the mid-nineteenth century.
The trend to freer trade began in the late eighteenth century. …it was the 1840s that saw the beginning of a true revolution in policy. Earlier moves towards freer trade had been conditioned by an insistence on reciprocity (i.e. agreements with other states on mutual tariff reductions),
but from the 1840s policy was determined unilaterally. The most dramatic instance of this was the Repeal of the Corn Laws in 1846. …It also reflected a growing belief that cheap imports were the key to prosperity because they would benefit the consumer as well as reduce business costs… Free trade certainly became a hugely popular cause in Britain… It was attractive not only because it guaranteed cheap food, but also because it supported the belief, widespread amongst both the business class and their workforce, that the state should be kept out of economic life.
What was the impact of this shift to unilateral free trade?
…free trade, in combination with heavy foreign investment, certainly helped to change the shape of the British economy in the late nineteenth century. …the long run effect of unilateral free trade had been to increase competition for British agriculture and industry, lower profits and stimulate capital exports. …this regime had yielded great benefits. British capital, pouring into foreign railways and other industries overseas, had helped to reduce agricultural commodity prices, shifting the terms of trade in Britain’s favour and raising national income. Dividends and interest payments on foreign investments had also increased greatly and these returns were realised by importing cheap foreign produce freely. Furthermore, …this unilateral free trade-foreign investment system had provided a strong boost to Britain’s commercial and financial sector.
Here’s the Maddison data on per-capita GDP in the United Kingdom between 1800-1914.
Looking at this chart, I’m wondering how anyone can possibly argue that unilateral free trade hurts an economy.
Once again, many caveats apply. Most important, many other policies play a role in determining national prosperity. It’s also worth noting that a handful of tariffs on products like wine and tobacco were maintained. Most troubling, the era of unilateral free trade coincided with the imposition of the income tax (though it didn’t become a money machine for bigger government until the 1900s).
The bottom line is that every example of unilateral free trade (or sweeping unilateral reductions in trade barriers) tells a positive story. Trade liberalization isn’t everything, but it’s definitely a huge plus for growth.
Yes, the best of all worlds is for trade liberalization to happen simultaneously in all countries, and negotiations have produced considerable progress since the end of World War II, so I’m somewhat agnostic about the best strategy.
But there’s no ambiguity about the ultimate goal of ending protectionism.
P.S. Sometimes bad things happen for good reasons. The income tax in the United States also was adopted in part to offset the foregone revenue from lower trade taxes.
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There is no question that unilateral free trade has helped some countries, because their businesses must compete and don’t have special dispensation to grow fat and lazy. (I’ll ignore export incentives, tax or otherwise, for now.)
There is also no question that China’s tariff policy has reduced imports and enriched their technology (through some theft), to the detriment of others.
How can success for both be true? China has come from relative nothing to one of the world’s top two exporters. On those exports they have to compete, tariffs are on imports, closing their market to others, which will eventually make domestic sellers fat.
Trump has taken the position that China is too big (now) to ignore as a market. We are willing to compete, as long as we compete fairly. The problem with his (hopefully temporary) strategy is that China is a command economy that can outlast us, to China’s long term detriment.
What I believe is that if, out of these tariffs confrontations, we end up in a world with minimum or no tariffs at all, humanity will give a quantum leap in prosperity and freedom. Thanks to Mr. Trump.
@Jeff – The UK put the agricultural protections back on in the very late 19th century, and ramped them up along with land-owner subsidies in the period after the first World War. There’s a plaque at Bletchley Park which mentions that the UK produced only 4/10ths of its own food at the start of WW2.
By comparison today, in round numbers, for every 78 units of food the UK produces, 18 is exported, and 40 imported, giving a consumption of 100. This could easily be increased by permitting GM crops to be sown, and stopping the system where the largest hand outs are for the most unproductive areas. Heck, just abolish the hand outs.
It’s a curious factoid but the part of the European Union with the biggest per hectare farmland owner subsidies is Greece. Has this increased ‘food security’ in the ancient cradle of civilisation? I think not.
Going back to Dan’s article about the repeal of the Corn Laws in the UK, this went hand in hand with the repeal of the Navigation Acts. There’s more on the changes that occurred here
https://iea.org.uk/how-free-trade-made-europe-great-part-3/
A lefty who would not have repealed the Corn Laws pointed me to this long read
Click to access 20n1a3.pdf
which shows that during the following years there were massive losses in wealth for people who already had it and didn’t deserve it. It made my heart bleed, it did.
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[…] Dan Mitchell makes an evidence-based case for the economic benefits of unilateral free trade. […]
Reblogged this on James' Ramblings.
Great essay and agree with the general sentiment. However, could there be an exception for a good/service that can be considered vital to national security? Britain faced starvation during WWII due to Nazi submarine warfare in the North Atlantic. Should they’ve considered protecting agriculture to mitigate that scenario?