[Economic Perspectives – 49]
BACK TO BASICS – AND THANKS FOR ALL THE FEEDBACK
Last week’s economics essay [EP 48] posted on the “Going Postal” platform generated almost 4,000 comments. The following four responses represent views expressed by many, and prompted me to expand on their subject matter this week. As follows:
1 – Understanding the relationship between imports and exports
The first of these expressed some puzzlement at my statement that we export in order to import, and hence that it is a mistake to regard exports as a “good thing” and imports as harmful.
We export to pay for our imports
Perhaps it would have been clearer if I had said that exporting enables us to import. To import goods we need to pay for them in the currency of the exporting country. We can buy the amount required from a foreign bank, or ask our own bank to buy it from a foreign bank in the exporting country on our behalf with instructions to remit it to our supplier.
Our supplier in the exporting country, or a bank on its behalf, is now holding our pounds. What will that bank (or our foreign supplier) do with those pounds? The only thing they (or anyone in that foreign country who may finish up holding those pounds) can do with them is use them to buy UK goods or services.
It would be the same, but in reverse, if an American importer wishes to buy British goods and pay for them in pounds. For that purpose the US company will acquire pounds from a UK bank and, after settling the bill, the UK exporter or its bank will be a holder of dollars. What will the British company do with them other than to purchase American products?
To accumulate a pile of foreign currency, and not spend it on imports from those countries, is equivalent to receiving a cheque in payment for goods, and then sitting on it rather than banking it!
2 – Free trade
Another reader objected to my statement that unilateral free trade would always be beneficial for the country that offers it. He wrote: “If you adopt a policy of unilateral free trade why would any other country wish to reach a free trade deal with you?”
This shows a fundamental misunderstanding of how international trade operates. The very point of unilateral free trade is that it provides all the benefits sought from any bilateral free trade agreement. If all trading countries adopted unilateral free trade there would be no need for any “deals”.
penalizing own citizens
If the government of a foreign country imposes a tariff on goods arriving from our country, it penalizes its own citizens by making them pay more for the things they wish to buy. While this also reduces the total amount of our exports to that country, there are plenty of other countries whose citizens are eager to buy from us, and whose governments do not impose tariffs or otherwise interfere with the flow of trade.
If the government of a foreign country applies its taxpayers’ money to subsidize one of its domestic industries it is (i) merely effecting an internal transfer of wealth that only the workers in those industries would have voted for; while (ii) making a gift of lower-priced goods to citizens in any country that imports its subsidized goods.
perfect illustration of principles
Right now, we have a perfect illustration of these principles at work [or NOT!]:
News report in “Open Europe”:
“Liam Fox suggests cutting tariffs on imports in No Deal Brexit
“International Trade Secretary Liam Fox is considering a plan to cut tariffs on all imports to zero in a ‘No Deal’ Brexit scenario in order to keep prices low for domestic consumers, he told a meeting with representatives of the ceramics industry on Monday. This would entail the use of executive powers to tweak the Trade Bill. Laura Cohen, chief executive of the British Ceramic Confederation, called the idea “foolhardy” as it could ruin the industry by “wrecking” the home market. A spokesman for the Department for International Trade stated that this was not official government policy, adding that Fox “said these are the options on the table and the government is looking at each one. The Prime Minister wants to exhaust each option.””
Unilateral free trade obviates the need for all such manipulative distortions in the guise of protection!
3 – Historic background to EU departure
Another reader wondered why no other member of the EU had tried to leave the club. While the wretched Brexit spectacle rumbles on endlessly, you may pause to consider why the departure of one member from a supposedly willing affiliation of participants is so disruptively shattering to all concerned. What kind of alliance is that?
The answer is that the mere thought of leaving the club is so heinous that it dare not speak its name! Although Brussels “Eurospeak” refers to “the 27” as if those “other” member states constituted a united team with aligned policy objectives, we know that this thin veneer glosses over deep fissures on many fronts, including unresolved historic resentments and the natural tensions of disparate cultures and languages. The trumpeted (but unproven) benefits of “ever closer union” and the adoption of a common currency have served to hide these ideological and temperamental disunities, but they still exist – and they manifest increasingly as the EU’s escalating economic woes threaten to expose the fragility of its bonds.
we WON the war
One effect of our attempts to wrest control from Brussels has been to highlight historical factors that might explain our referendum result (despite the immense efforts of our Westminster rulers to pretend that it never happened!). For example, it is noteworthy that although all other 27 countries were deeply affected by the war of 1939-45, Britain alone is justified in looking back on it as an episode of national triumph – indeed, is able to say that, together with the USA, Russia and Commonwealth allies, we won the war. Similarly, the UK and Sweden are unique in not having, in living memory, experienced life under a dictatorship. Who can say that factors like these have played no part in our determination to re-establish independence?
Securing our borders, or plain old job protection?
My fourth reader raised a tough issue that I had not covered in my essay. She asked what I thought of the government’s intention to protect the jobs of low-paid British workers by requiring even unskilled immigrants to have pre-arranged employment offering an annual wage of, say, £30,000 before being granted entry. She questioned whether this differed in essence from any other form of subsidy-style protectionism that finishes up with citizens having to bear higher prices for goods and services.
As it happens, this was the very issue that constituted David Cameron’s last stand in his battle with EU chiefs over the single market’s four freedoms of movement: goods, services, capital and labour. Cameron failed to secure EU agreement to the UK imposing a limit on immigrants’ entitlement to benefits on arrival in the UK, a failure that was closely followed by the 2016 referendum.
Although at first sight the latest proposal appears to be an ill-disguised attempt to prevent cheap Eastern European labour from taking British jobs, it’s not as simple as that. It hinges on the imperative of protecting our borders, which would of course be impossible if government were forced to agree to free movement of people. Indeed, this is one of the main reasons why so many voted to leave at the referendum.
It is not simply a case of anti-immigration bias – we all know how dependent we are on overseas workers in our hospitals, construction sites and on our roads. But protecting our borders is an essential element of protecting our property – and that includes the money we pay the state in taxes. Those taxes are raised to meet the costs of essential services and, to the extent that government permits taxpayers’ money to support the welfare of jobless economic migrants, the principle of protecting private property has been compromised.
Therefore we can argue about the means of assessing the ability and willingness of new arrivals to contribute to our society (and having a firm job offer is a good start) but acceptance of immigrants into society is a privilege, and not an automatic right that is always open to abuse – as is the case under single market rules. Immigrants who come in order to contribute, not to sponge, should always be welcome.
Venezuela doesn’t have an immigration problem!
Immigration is a wonderful index of economic prosperity, which is why Venezuela does not have an immigration problem.
[EMILE WOOLF 6/2/19]