Thursday, 22 October 2015

It's Rare To See This Much Confusion About Trade

If the UK steel situation has taught us one thing this week, it's that most UK citizens, and apparently many politicians too, do not understand the benefits of trade. In wanting to protect British industry with barriers to foreign imports these people are showing economic ignorance of the worst kind. Take this article in The Guardian, for example - it is staggeringly rare to find so much economic illiteracy in one piece of writing. Rather than going through a point by point rebuttal of all the individual errors, I'll just explain the benefits of import/export trade and the way trade barriers harm both sides.

Suppose it costs a UK plant £120 to produce a tonne of steel, and a Chinese plant £100. And suppose the reverse is true for pharmaceutical products: while it costs a Chinese pharmaceutical company £120 to produce 1kg of a particular medicine, it costs a UK company £100. If there are no barriers to trade, the British will buy Chinese steel and the Chinese will buy British medicine.

But suppose the UK government wants to protect the British steel by imposing a tariff of £40 per tonne of imported steel, pushing the price up to £140 per tonne, this is good for British steel providers, but it's bad for British steel buyers who must pay more. But it's also bad for other British companies too, because some of that money would have been spent in their industry.

On the whole, it's fairly easy to see that Brits are worse off from the tariffs, because they hamper the process of best value based on market clearing rates. It's equally obvious how subsidising our own industrial exports has a further damaging effect. Suppose that the UK government subsidised British steel to the value of £40 per tonne - this would advantage British steel producers and the foreigners to whom they sell, but it would disadvantage everyone else.

This kind of economic ignorance is rife - so much so that I'll bet if you asked everyone in the UK if it's true that imports benefit the UK whereas exports take away some of that benefit and give it to other countries, a lot would say they agree.

But, alas, in agreeing they have their reasoning backwards, because what we consume (goods and services) is the true measure of the value created. If we export a product, people outside our country consume it; if we import a product, we consume it. If we export more than we import, our consumption is not in surplus in relation to what we produce. It's true that a trade surplus means there is more money coming into the country from foreign buyers, but money has value only in what is consumed from it - without consumption it is merely 1s and 0s in a bank account. It is only when consumption occurs that the real benefits of money are brought to bear, which means it ought to be more obvious that you do not need a surplus of imports over exports to be better off, and you certainly do not need import tariffs to make your country better off.