On 8th March President Trump authorised the imposition of tariffs on steel and aluminium imports into the US - albeit with Canada and Mexico exempted. The move is aimed at protecting US producers of these commodities from 'unfair' foreign competition.
The 25% tariff on steel and the 10% tariff on aluminium will come into effect later in March - although we can expect fierce lobbying by countries who export these goods to the US (the UK included) to be exempted from these protectionist measures. With this move potetntially starting a trade war, with other countries retaliating against US exports and with other commodities having tariffs imposed upon them, I thought it timely to republish my blog from July 2016 on the pros and cons of free trade.
Free trade is good - is it not?
Economists are renowned for disagreeing with each other. However one agreed economic wisdom is that free trade is good for economies. Given the drive by the UK to secure free trade deals with overseas countries following the Brexit vote in the EU referendum this economic truism is coming under scrutiny.
The rationale that free trade is good for economies and, hence, households is rooted in the work of the economists Adam Smith and David Ricardo, writing in the 18th and 19th centuries. The work of these economists represents that countries should specialise in the production of goods where they have an advantage – by virtue of local resources and/or expertise – and export these goods in exchange for those where they have a relative disadvantage in terms of productive capability. In aggregate those countries that engage in specialisation and free trade end up better off by, in effect, harnessing the global proficiency to produce products.
It is this much vaunted mantra that ‘free trade is good’ that seems to be supporting the UK Government’s drive to secure free trade deals with key countries in the wake of the Brexit vote.
We should, though, take care to be alive to the potential threats to the domestic economy that can arise from opening itself up to free trade with the rest of the world.
One threat is known as ‘dumping’ where exporting countries deliberately undercut the prices charged by domestic producers to secure sales and maintain their production levels. Tariffs on imports can be used to provide protection from this practice - but this clearly flies in the face of free trade. Note that the US move in March 2018 to apply tariffs on imports of steel and alumiuim is in response to the alleged dumping of these goods in the US by overseas exporters.
Another issue is that free trade may inhibit the development of new industries. Why is this? Well in their early days new industries need time to build up expertise and the critical productive size to compete on an equivalent cost-per-unit-of-production basis with established overseas producers of the same goods. Free trade can stifle such ‘infant’ industries at birth; protective trade policies can provide a lifeline to burgeoning industries.
We can expect much heralding of free trade deals with overseas countries in the coming months. We should, though, be aware that free trade is not always good news for businesses – and hence households – in the UK.
Martin Upton
Director of the True Potential Centre for the Public Understanding of Finance (True Potential PUFin)
9th March 2018
The establishment and activities of the Open University’s True Potential Centre for the Public Understanding of Finance have been made possible thanks to the generous support of True Potential LLP. True Potential has committed to a five-year programme of financial support for the Centre. Views expressed by True Potential PUFin may not reflect those of True Potential LLP.