Politics makes strange bedfellows; coalitions especially. In the 1970s the Liberals made a pact with socialists despite socialism being the antithesis of liberalism; in 2010 the coalition finds us in bed with Conservatives despite the Tories opposing liberalism for centuries.
Coalitions therefore require us to remind the voters how we differ from the parties with which we are aligned in government. This week a new report from the Conservative-leaning think tank Civitas reminds us of one crucial difference: the Tories have always opposed free trade.
Reviving British Manufacturing: Why? What? How? appears to be a throw-back to a former time, when the Tories banned wheat imports to protect the interests of their landed backers. Between fawning praise for Margaret Thatcher (“No one doubts Mrs Thatcher’s commitment to a market economy, [Er… Yes they do – Ed] but she was no market fundamentalist and her pragmatic patriotism is often forgotten“) Civitas suggest that the UK should indulge in one of the most fundamental economic blind-alleys in the Handbook of Bad Government: protectionism.
The reason that Civitas cite for this bizarre and dangerous policy is the UK’s balance of trade deficit, which measures the net flow of payments for goods and services into/out of an economy. Civitas argues that “We already have a balance of payments problem… With the annual trade deficit in goods now at a new record of £97.2 billion… only radical Government action will prevent Britain’s permanent decline as an industrial society“.
In fact, they later admit that the real trade deficit is £46.2 billion, but that they are choosing to ignore the trade-surplus from services. This is an absurd confidence trick, which ignores the fact that the UK’s comparative advantage is in services (Yes, even financial services! – try to contain your disgust). This attempt to make us focus only on one part of the economy is risible: I suspect that if one ignored manufacturing and focussed solely on services one could argue that China is running a trade deficit; if so, the politburo do not appear too bothered.
Even accepting that there is a trade deficit, this does not matter. As Milton Friedman noted, £100 billion is only of use to foreigners because it enables them to buy £100 billion worth of British goods. The pounds themselves are useless to them: “they cannot eat them, wear them, or live in them. If they were willing simply to hold them, then the printing industry – printing [pounds] – would be a magnificent export industry… [that] would enable us all to have the good things in life provided nearly free by the” nations foolish enough to swap perfectly good goods and services for paper adorned with the Queen’s face.
In fact, many foreign nations seem quite prepared to do that, and worse: they then lend the money back to the UK. This has created twin problems: on the one hand, it enabled us to buy even more of the good things in life (such as the public services spending splurge from 2001 to 2010), but only by borrowing against our future and that of our children. Secondly, it kept our currency high and theirs low, thus making our exports less competitive and theirs more attractive, and so exacerbating the balance of trade problem.
The solution, one might therefore think, is to stop borrowing the money. If they can’t lend it to us, they will have to spend it in the UK, and so we will achieve equilibrium in our balance of trade (but with a weaker pound). However, if you are a Tory think tank, there is an alternative: protectionism.
“the Government should encourage an increase in manufacturing output by about £10 billion per year”, the report argues, (why not £11 billion? 12 billion? What’s so special about £10 billion?), but crucially, this should not be done through promoting exports (itself dodgy, but now is not the time), but by import substitution: “exporting is costly… in the short run … it will be much easier to focus on the home market and out-compete importers.”
Import substitution is economic madness: not even Labour recommends this sort of thing anymore. It completely ignores the Law of Comparative Advantage(aka. the Ricardian Law of Association) and indeed undermines the whole basis of trade, which is specialisation and the division of labour.
And what are the four industries that Civitas wants the UK to specialise in over the next few years? Where should we focus our efforts, expanding domestic supply by throwing up walls to prevent cheap foreign imports?
In a companion essay, Civitas cite four particular industries that might not strike the average reader as particularly promising: Paper; Glass; Steel and Motor Vehicles. Admittedly, we have some good companies operating in each of these industries, but the idea that Wernham–Hogg paper merchants will become engines of the British economy is hopelessly naive.
Add to this the suggestion that Britain should establish a “Ministry for Economic Growth, focused purely on reducing the trade deficit through increasing production” (where to begin with this one?) and a tacked-on side-swipe at the European Union and you have a classic piece of Tory wonkery.
In 1962 Milton Friedman argued that “It is not too much to say that the most serious short-run threat to economic freedom… is that we shall be led to adopt far-reaching economic controls in order to ‘solve’ balance of payments problems. Interferences in international trade can seem innocuous: they can get the support of people who are otherwise apprehensive of interference of government into economic affairs… yet there are few interferences which are capable of spreading so far and ultimately being so destructive of free enterprise.”