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10 tweets,
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Short thread on why (despite sounding like common sense) this is not "simple economics" at all. In fact, simple (trade) economics says that abolishing tariffs, while at the same time export on WTO terms (ie our exporters face higher tariffs) will not affect the trade balance.
Why? What does “simple economics” tell us will happen here? Well, abolishing import tariffs will make imports cheaper, while moving to WTO rules makes our exports more expensive in foreign markets. So we’ll sell less and buy more? No. (2/10)
In fact, simple economics – International Trade 101 – tells us that with a floating exchange rate, as the UK has – the £ will fall. This will make imports more expensive and exports cheaper, counteracting the impact of tariff changes. (3/10)
Moreover, since the trade balance is – as a matter of accounting – simply the difference between domestic saving and domestic investment, you wouldn’t expect tariffs to have any direct impact on the trade deficit. (4/10)
[Note that a similar logic applies in the US. Trump wants to raise tariffs on imports and get other countries to lower them on US exports – the inverse of what moving to WTO rules would do for us. It won’t work in reverse either!] (5/10)
This doesn’t mean that in practice there would be no impacts at all. For a start, “moving to WTO rules” wouldn’t raise/lower tariffs across the board. There would be distributional impacts – which would be biggest for agriculture. (6/10)
But the (positive) impacts on consumers overall of lower tariffs on food would be largely offset by the fall in £; which would also counteract the (negative) impacts on exporters of higher tariffs. (7/10)
And for manufacturing (where WTO tariffs are mostly pretty low) customs checks and non-tariff barriers are likely to be a bigger deal. Which is why a simple FTA with the EU isn’t good enough for many. (8/10)
Nor would we expect to see job losses overall. Again, simple economics tells us that trade policy doesn’t affect aggregate employment/unemployment ,which is driven by domestic policy choices (education, skills, the welfare system, etc). (9/10)
There *are* arguments against moving to unilateral free trade (abolishing all import tariffs). But it’s hard to get them from “simple economics”. They relate to much more complex economic and social issues (adjustment costs, structure of regional economies, etc). (10/10) ENDS
