Ideas@TheCentre
Faith in free trade
Free trade is an article of faith for economic liberals.
The arguments that favour it are well known. The theory of comparative advantage tells us that all countries will be better off if they specialise in doing the things they can do most efficiently and then trade their products with each other. And history tells us that when nations start erecting barriers to trade, it can trigger recessions and even lead to wars.
And yet ...
In Britain recently, the country’s last manufacturer of railway rolling stock, Canadian-owned Bombardier, announced it was laying off 1,400 workers at its Derby works. Bombardier had lost its bid for a £1.5 billion government contract for new carriages to Siemens in Germany, so the work will go there instead. Look around the European Union: 100% of French rolling stock is built in France; 90% of German rolling stock is built in Germany; but now, in the country that invented the railways, British rolling stock will no longer be built in Britain.
Politicians shrug their shoulders and blame each other. They assure us Siemens can provide the carriages cheaper (mainly because they can borrow the capital at lower rates of interest), so British taxpayers will be better off than if Bombardier built them. Economists say the 1,400 redundant workers will find other jobs in sectors where Britain still enjoys a comparative advantage.
But in my lifetime, I have seen British manufacturing collapse and welfare dependency spiral as a result. Large parts of the country now have little or no employment outside the bloated public sector. Manufacturing has dwindled to only 13% of Britain’s GDP. True, there are other areas where the country performs much better. Financial services make up 10%, for example. But those redundant Derby workers are not about to find employment in the City of London.
I’m not an economist, but have the British taxpayers really gained by giving this latest contract to Germany? They may have saved a few million on the purchasing cost, but how much extra will they pay out in welfare benefits? When Smith and Ricardo were writing about free trade, governments weren’t responsible for almost half the nation’s GDP. Does the theory of comparative advantage still stand up when government is the major purchaser and supporter of those thrown out of work because of its purchasing decisions?
Should a country really be content to see its core manufacturing base disappear like this? It’s not inevitable in a globalised economy – Germany, for example, seems to have found a way to remain competitive in manufacturing, even against the rise of China, India and Brazil.
Of course, Britain is a member of the European Union, and EU rules prevent member states from favouring their own businesses. But the French and German governments seem to have found ways of ensuring that major public sector contracts go to their own companies, whatever the EU rules say, and their people do not seem to be worse off than the Brits as a result of their politicians massaging the free trade rules.
Peter Saunders is an Senior Fellow with the Social Foundations Program at The Centre for Independent Studies.
