Ending import tariffs does not require smashing plates

Ending import tariffs does not require smashing plates

by Eben Wilson
article from Thursday 7, February, 2019

AS CONSUMERS with choice, we should beware those who prophesy doom if the UK chooses a zero import tariff policy post-Brexit.  This, it is suggested, is being considered by the Department of International Trade. 

Beware, first, the messengers. More often than not these will be the trade associations; purporting to lobby with a unified voice across their sector, but if you look more closely, always channelling the views of those firms with the most to lose in their industry. Growing, successful, innovative businesses very rarely need to lobby, so collective industry lobbying is skewed to the least robust. 

Remember too that all market sectors are varied, businesses differentiate their product and service offers to gain advantage; the idea that a trade association can truly represent the views of an entire industry is as false as saying any of our political parties can ever have a unified collective policy view. There are always outliers and dissenters. 

Now the difficult bit, the economics. I say difficult, because the notion of comparative advantage that lies at the heart of the benefits of free trade theory is one of the least common-sensical ideas for non-economists. Yet, the difference between competitive advantage, which is relatively easy to understand, and comparative advantage is crucial to defend a free trade Brexit against crass comments such as those from Barry Gardiner MP, Labour’s shadow trade secretary, who says: “What is proposed is extraordinarily damaging. Reducing all tariffs on imports to zero would undermine our domestic producers in their home markets, and risk serious job losses in key industries from ceramics to farming.”

That view, institutionalised in a policy of “import substitution” using high trade tariffs, led to decades of poverty and starvation in most of sub-Saharan Africa.

The ceramics sector has been championed on the BBC as a potential victim of a free trade policy. The British Ceramic Federation has made its case that their plate industry would be decimated by setting tariffs on any imports of crockery to zero. 

At face value, UK producers do not have an advantage when up against low-cost overseas production areas.  But let’s be careful, such distemper brush comparisons are mischievous. I am pretty sure that a plain white plate produced in Brazil using the same machinery as a plain white plate in Stoke can be made more cheaply at a factory.  But is that the right comparison?  With respect to the plate itself, what about the quality of the clay and its cost, actual machinery versus handwork in the making of plates, transport costs, and the productivity of the workforce? And what about the logistics of delivery, the availability of stock on demand, the brand and design variations, the legacy of a “Made in England” brand personality that skews customer price preferences and expectations, knowledge that replacement items will be available, special personalised gift wrapping, family heirloom premium and so on.  Purchasing decisions that lead to profitable trade are not just about products, they are about service.  That’s why most imports are sold by UK companies, usually within a range of options, and you don’t go to the docks and pick them up. 

A comparative advantage allows for all of these factors; the focus is on what is lost in addition to what is gained from a mere cost advantage.  The idea that the UK ceramics industry would lose a vast amount of profitable trade simply because plates can be manufactured cheaper overseas is simply wrong.  What actually happens is that producers of an end-to-end service trade-off all the gains and losses and contract in a way that maximises the total welfare of both players.  This can mean UK companies paying for imports and their transportation costs, but it can also mean overseas exporters using UK companies for their design and branding service and logistics. 

Nissan, Diageo, Chanel, BMW, Zara, and Nestle are all companies who have mixed and match their business proposition globally using comparative advantage; the outcomes produced across industries all have vastly increased worldwide welfare through globalisation reducing the numbers living in complete poverty by two thirds over the last twenty-five years.  Contrast that to what curtailing imports did for Africa for the previous twenty-five years. 

Crucially, this global trading is a far more complicated economic calculation than any politician can make due to another factor; consumer choices change through time.  And it is those changes that protect workers because producers have to adjust and invest in new ideas to survive.

The ceramics industry grew up in the Stoke Potteries because coal and clay were available locally. From early days of hand-made pottery, steam power and then electric machinery brought higher and higher productivity and higher wages – but using fewer more highly skilled people. 

Some players thrived, the wide ranging Royal Doulton offer is prized across the world despite being comparatively expensive; others dived – who buys Wedgwood ornaments anymore?  (They are now made in Indonesia to serve Asian demand for them.) The sector is rightly proud of its high value products and global sales. 

Stoke’s workers meanwhile have changed with the industry.  Some have gone to other sectors; Stoke is the UK headquarters of Michelin tyres and has a huge regional hospital. It is also home to major M&S, Sainsbury’s and other distribution centres.  While operatives still in ceramics earn modestly, technicians and line managers earn above average, ceramics firms compete for labour with the centres above, keeping wages similar to most industrial sectors in the UK.

The important lesson here is that the engine of comparative advantage, channelled through the changing contracted elements of international trading improves lives. Consumers gain through lower prices, labour gains through innovations; the people who have to keep their eyes on the ball and be agile are the directors of the companies. Given that they are paid the most and tend to be the best qualified that would seem to me to be a good design for a fair industrial eco-system. 

The alternative is stasis; industries protected by government that control their futures – almost by definition when protected a future of slow decline that damages wage earners.  Protecting wage earners in a changing world needs a properly constituted welfare system, not a state-designed industrial policy. 

Somebody should send the Labour Party a history book about the damage that import tariffs can do. Of course, the other thing we are going to have to suffer over the next few weeks is the doomsters supporting each other in confirmation of each other’s pessimism, no doubt bolstered by the acquiescence of the mass media the inadvertent touting of confused ideas.  I was amused this morning by John Humphries of the Todayradio programme rejecting the value of a reference by a liberal economist from the Adam Smith Institute to the repeal of the Corn Laws in 1846. In declaring that “he did not want to go back that far”, Mr Humphries inadvertently offered support for the mercantilist ideas of the 1750s instead.  The rejection of those is precisely the Brexiteer argument for exiting the EU.

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