Why there should be no tariffs
The British government has agreed that Bangladeshi goods should continue to have duty free access in to the UK market after Brexit. This is, of course, a good idea. Which is why I and my colleagues at the Adam Smith Institute have been arguing for it. We do not claim to have swung the matter, only that we are one of the voices that has been arguing for this obviously sensible decision.
What’s rather more important though is why this is a sensible decision. Yes, clearly, factories in Bangladesh, and thus workers and so on, will be happy because the absence of the tax means that more sales, more jobs, are likely. But that’s not a clinching reason for the absence of tariffs, those benefits to exporters. The truth being that the benefit of trade is the imports. That is, it is of benefit to British people that they do not have to pay tax to buy Bangladeshi clothes. So, do not tax British people for buying Bangladeshi clothes.
The perceptive will note the implication of this argument. That there should never be taxes upon people for buying foreign goods -- there should be no trade tariffs, that is. This being something that economists repeatedly tell everyone who asks, but very few politicians indeed are willing to hear.
The underlying argument comes from Adam Smith himself -- you can understand why someone at an institute named after him might like this -- and is about the division and specialization of labour. None of us is good at everything, some of us at least are good at doing some things. It makes sense for things to be done by people who are good at them.
That way, we get better things and also we get more of them. So, that’s the division of labour, we each do different things and make different things. As we do so we are “specializing” and as we do more of the one thing then we will get better at them. So far, this is just obvious from any observation of the human beings around us.
It applies to who cooks and who puts up the bookshelves in a household just as much as it does to who makes clothes and who does the accounting in the economy as a whole.
If we are to have this division though, we clearly need to have trade following it. It’s no good the cook having nowhere to put her books, nor the shelf-maker not being able to eat. Or, of course in the country as a whole, only the clothes-makers having anything to wear and the accountants being entirely naked. So, that increased and specialized production must be traded.
The thing about this argument is that there is no obvious difference between the few people within a household, those in a village, a town, a country or the entire world. We are all made better off by more division, more specialization, and more trade in the resultant higher production. I do have direct and personal experience of this.
There was a time, 15 years back, when I was just about the only person in the world who made their living by dealing with one specific metal. It was a very, very, small market, perhaps two tons a year for the entire globe. That’s an extreme of specialization of course, but that’s the correct end result. That production of whatever it is, is done by whoever, anywhere in the world, is best at it.
The important thing to understand here is that it is consumers that are made best off by trade. When we are able to buy from the best -- which is up to us, that might mean best quality, best price, nicest colour, whatever it is that we ourselves prefer -- producer in the world, then we are made better off.
Sure, producers, like the Bangladeshi RMG industry, are made better off by being able to sell things. But it is the people who wear the clothes who gain the real benefit from the process. They’re able to wear nice cheap clothes instead of having to spin and weave their own clothes -- as everyone did have to do 500 years ago.
That is, as economists keep saying, it is the imports that are the benefit of trade. Exports are just the work we have to do in order to be able to buy the imports we want.
When it’s all laid out, correctly, like this, then the decision about having no tariffs makes perfect and entire sense. The only thing that doesn’t is why anyone would ever want to have tariffs at all. The answer being that people don’t understand the above enough. A tariff is us consumers being taxed because we buy what we want. Why should that happen?
It shouldn’t, therefore, there should be no tariffs, should there?
Tim Worstall is a Senior Fellow at the Adam Smith Institute in London.