Thursday 16 February 2017 4:45 am

Winning the battle for completely free trade post-Brexit will vastly increase UK prosperity

Economists for Free Trade (of which I’m part) is launching today to make the case for the UK to run completely free trade once we leave the EU in 2019. Our aim is simple. We want Britain to lead the world on free trade. Our group has been formed to fight the battle which needs to be won in every generation.

In 1824 Thomas Babington Macaulay stated: “Free trade, one of the greatest blessings which a government can confer on its people, is in almost every country unpopular.” Two centuries on Macaulay still rings true.

In 1992 Ross Perot, a Texan billionaire, ran for the US presidency on a platform of opposing Nafta, with his memorable line about a “giant sucking sound” emanating from south of the border. Twenty-five years later a New York billionaire has reached the White House, with a determination to impose protectionist measures on Mexico and China.

Anti-globalisation, anti-EU protectionist rhetoric is rampant across Europe with a populist threat in forthcoming elections in the Netherlands, France and Germany (and in Italy if an election is called). The irony of course is that the EU itself is a protectionist fortress, surrounded by a Customs Union. But then, anti-free trade rhetoric has never worried too much about the facts.

In contrast, Douglas Irwin, Dartmouth College professor of economics and author of Free Trade Under Fire, has pointed out that 90 per cent of US consumption spending is on domestic goods and only 1 per cent is on Chinese goods! He also points out that if Americans were just as likely to purchase goods and services from foreign producers as from domestic producers, the US import-to-GDP ratio would be equal to the non-US share of global GDP i.e. 75 per cent instead of 15 per cent. Despite the large trade deficit the US is not overrun by imports.

Moreover, let’s imagine the hypothetical that President Trump changes everything and from tomorrow the US moves from trade deficit to trade surplus. Would everyone then be happy? I doubt it. It wouldn’t take long for politicians on Capitol Hill to realise that the inflow on the current account would now be matched by an outflow on the capital account (so the balance of payments balances), with howls of anger about American money still going overseas.

The classical case for free trade was made by Adam Smith, David Ricardo and John Stuart Mill. Smith argued that free trade would increase competition in the home market and curtail the power of domestic firms to exploit consumers with higher prices.

This was famously added to by David Ricardo’s theory of comparative advantage. Even if a country had an absolute advantage in all goods and services, Ricardo said it should still specialise in those activities where its comparative advantage was greatest. Mill argued that there were three advantages from trade: direct (specialisation along the lines argued by Smith), indirect (essentially productivity gains) and moral (for example, free trade encouraging greater political freedom).

Fast forward from the classical economists to the present, and the case for free trade remains just as powerful. There is overwhelming evidence that free trade improves economic performance by increasing competition in domestic markets, through trading at world prices. This is the great potential for Brexit to increase prosperity in the UK. Irwin writes that “almost invariably more open trade policies are associated with higher per capita income”. This is one forecast economists can get right.

From the Phoenicians, the Venetians and Victorian Britain, to China and Singapore today, trade has raised prosperity. Trading at world prices – when the UK departs the EU Customs Union – will significantly increase UK prosperity. More competition means more prosperity. And in order to maximise competition, the greatest competitive force is the world not the EU.