Business

Stop sacrificing free trade by banging the protectionist drum

On both sides of the Atlantic, traditional defenders of free trade are wavering.

In the United States, the once proudly pro-business Republican party has, under Donald Trump, adopted protectionism and trade warfare with barely a whimper.

Trumps administration rejects the logic of international integration that has underpinned global prosperity since the Second World War, instead seeing trade as a zero-sum game, a crude question of “winning” or “losing”.

Protectionism isnt restricted to the right – if theres one thing Bernie Sanders and Trump agree on, its that trade hurts American workers. That is why Sanders supported Trumps withdrawal from the Trans-Pacific Partnership negotiations, and a lot of Democrats are egging Trump on.

In the UK, there is a long-standing cross-party consensus in support of an open trading system, albeit with a wobble in the 1970s when there were trade restrictions on labour intensive products from developing countries. In fact, even during this time, it was technology that often replaced the workforce that trade barriers were trying to protect.

The Brexit arguments are more complex than free trade versus protectionism.

The government uses the language of free trade and “global Britain” while putting up trade barriers, disengaging from the EU Single Market for the highly uncertain prospect of trade deals elsewhere.

But according to the impact analysis conducted by the government itself, even if the UK is successful in concluding bilateral trade deals with the US, China, India and Australia, these will not come close to compensating for new barriers with our European neighbours.

As Sir Martin Donnelly, my former permanent secretary at BIS and later at the Department for International Trade recently put it, this is the equivalent of swapping a three-course dinner for a packet of crisps.

Protectionism is, however, not simply about trade in goods.

A key feature of the Brexit process is that it seeks to separate out and reverse one of the Four Freedoms: the free movement of labour.

For this reason, the economic benefits of the EU Single Market are being sacrificed. And it also accounts for the failure to make progress in trade discussions with India, which wants to see more visas for Indians in return for greater access for British exporters.

Even in conventional trade policy, the lure of post-Brexit protectionism is proving irresistible – as in the recent uproar over the decision to hand a contract for producing British passports to a French rather than a British firm.

Former Conservative cabinet minister Priti Patel fumed that the decision was “a national humiliation”, while Brexit advocacy group Leave.EU blamed “deranged globalists”.

Both Patel and Leave.EU have repeatedly made the case for Brexit in terms of free trade. Yet when a chance came to uphold those principles in practice, they abandoned them in favour of xenophobia and protectionism.

Revealingly, Labour took the same line as the Tory Brexiteers, arguing that British passports should be made in Britain. Neither party seem to have noticed that the passports would actually be made in Britain, generating jobs in Hampshire and Lancashire, albeit by a foreign-owned company.

Each generation seems to have to go through the same process of rediscovering the basic arguments in favour of a free trade system. Countries are better off when they participate in specialisation, with consumers benefiting from greater choice, higher quality products, and lower prices. For businesses, the benefits include cheaper inputs, greater export opportunities, and healthy exposure to overseas competition.

There are of course losers from intended competition, and Trump in particular has exploited the anger and fear of the losers.

In practice, the impact of technology is far greater, but it is politically more effective to blame foreigners. It is also true that some countries have at times played by a different set of rules – by manipulating their currencies, subsiding exporters, or not applying agreed standards.

China is currently the butt of these criticisms (at least from the Trump administration), yet it has actually come a long way since joining the WTO.

Retreating from over seven decades of global economic integration is certainly not the way forward. Instead, we need to ensure that the UK benefits from trade through a mixture of outward-looking industrial strategy (primarily support for innovation), training, and action against unfair practices through – rather than outside of – the auspices of the WTO.

The Liberal party was founded when disillusioned “Peelite” Tories broke with their party because of its protectionist trade policies. In fact, the Conservatives once considered renaming themselves “the Protectionists”.

A century and a half later, these battles are being refought in a modern context. And as leader of its successor party, the Liberal Democrats, I will continue to make the British case for free trade.

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