1 – Reminder: People (Not Nations) Trade
Sir James Dyson has recently entered a plea for the UK to focus on the world’s fastest-growing markets, noting that the UK doesn’t need to be a member of the EU’s single market in order to trade with countries in the EU.
In 2017 the USA, as an outsider, conducted a third of a trillion euros of trade with EU countries without having to accept the jurisdiction of the European Court of Justice, freedom of movement, the need to pay billions in annual subventions or a host of regulatory stipulations.
He reminds us that neither nations nor government ministers, for all their posturing, actually trade. Businesses, run by people, trade – and it is the trade in which they are engaged that brings prosperity to their nations.
2 – The Export / Import Myth
Since the exports of every nation are other nations’ imports, why does the myth persist that exports are somehow “better” than imports? But absurdity has never been a barrier to political argument, so we should not be surprised.
Obviously, it is impossible for every trading nation to end up with a surplus of exports over imports at the conclusion of each trading period, since every trade surplus must carry its equal but opposite counterpart somewhere within the accumulated trading balances of other nations – assuming compatibility statistical measures.
3 – Resorting to Protectionism
It is on the misguided notion that exports are preferable to imports that the anti-competition practice of protectionism is founded – bringing with it all the usual jingoistic flag-waving: “British jobs for British workers”, “protecting our export industries”, “ban dumping of cheap foreign goods” – and the rest.
The trouble with agitators for the protection of domestic industries is that they view trade economics through an upside-down prism in which it is the function of consumers to serve producers. Rather, it is the function of consumers to consume, and the function of producers to serve their consumption demands. National boundaries need play no part. Obvious, isn’t it?
Despite all the evidence of economic history, the myth persists that protectionism is an effective tool for punishing imports, boosting exports, creating (and preserving) employment and generating economic health.
The fallacy of this xenophobic mindset could hardly have been more succinctly expressed than in the writings of the 19th century economist Henry George on the virtues of free trade. To paraphrase: You wouldn’t fill your harbour with rocks to keep out the goods that your citizens want to buy, would you? Well, that’s exactly what you are doing when you slap tariffs on imports!
4 – The Counterpart to Tariffs: Subsidies
Whenever a government meddles in matters best left to entrepreneurs, industrialists, traders and farmers, the usual result is unprincipled, politically inspired regulation that generates more misery and conflict than that which it seeks to remedy. The cyclical process of blind correction keeps on turning, accumulating more regulatory detritus, destined ultimately to collapse under its own weight.
How else could a monster such as the EU’s Common Agricultural Policy (CAP) have come into being?
The network of subsidies embedded in the CAP has inflicted untold hardship on EU citizens and benefited no one beyond the isolated circle that contrived it in the first place.
Despite its founding aim of supporting EU farmers by imposing a maze of cross-border subsidy regulations, its unintended consequences, notably the unremitting inflation of consumer prices of foodstuffs, have taken it well beyond the point of no return and rendered it fit only for the scrapheap.
At root it is a system of subsidies paid to farmers, intended to guarantee minimum levels of production so that no one goes hungry! And surprise, surprise: its lavish subsidies generate monumental overproduction, costing close to half the EU’s annual budget of £60 billion!
The EU subsidies also cause widespread market distortion when it sells its overproduction cheaply to third world countries, and its intensive farming practices are environmentally damaging. The whole thing is so badly unbalanced that 70 percent of its massive budget goes to only 20 percent of farms.
There have been endless attempts to reform the CAP, but each reform generates its own trail of bitter resentment and malign consequences. France, the CAP’s largest beneficiary, is in any case fundamentally opposed to any reform that would reduce the undeserving subsidies lavished on its farmers.
It is a nightmarish charade, and its only useful feature is its graphic demonstration that most government meddling is, by its very nature, utterly incapable of fulfilling a meaningful economic purpose.
5 – Conclusion
These outcomes repeatedly highlight the harm inflicted on whole communities by governmental interference designed to favour a particular politically motivated outcome. If permitted to find their own methods of addressing the logistics of international trading arrangements, people and businesses can achieve an untrammelled international flow of goods and services.
In next week’s economics lesson I shall address questions concerning trade deficits and surpluses – issues invariably, and unnecessarily, shrouded in mystery.