Select Committee on European Union Seventeenth Report


The following is reprinted from the Committee's previous report.

The Committee considers that the case for further trade liberalisation is a strong one, for three main reasons. First, freer trade allows countries to specialise in what they do best. The effect is greater economic efficiency, which in turn allows more goods and services to be produced and consumed in total than would otherwise be the case. This does not mean that one country's gain is another country's loss: two countries trading with each other can both be absolutely better off if they specialise. The resulting increase in economic welfare can contribute towards development objectives and poverty reduction.

Second, a market which is open to imports is a market in which domestic producers are exposed to competition from overseas. If such producers can compete successfully with imports, they are far more likely to be competitive at home and overseas themselves. An open trading system provides important market signals towards structural change and economic reform, which would be far harder to achieve within a closed system.

Third, competitive imports give the consumer a better deal in terms of price, quality and choice. In contrast, a policy of maintaining trade obstacles to imports tends to raise the cost of living and reduce consumer choice.

We regard these arguments as compelling, with one proviso. Freer trade also needs to be fair. Unfair means of attacking others' markets, (for example, through trade distorting export subsidies), or of keeping out legitimate imports (by means such as discriminatory and unjustified use of technical regulations), need to be actively discouraged by the trading system. But an ability to compete effectively on price, including the price of labour, should not be regarded as unfair trade.

There are of course those who argue that further trade liberalisation is undesirable, in particular for developing countries. Some such arguments are that:

  • developing countries should be able to shelter their new industries behind tariff walls rather than allow them to be exposed to full global competition (the so-called "infant industries" argument);
  • certain "strategic industries", for example steel and machine tool production, need to remain home-grown for reasons of security of supply;
  • domestic political obstacles can make further liberalisation very difficult. Full account needs to be taken of these before advocating a trade-opening course;
  • there should be a level playing field when it comes to environmental, animal welfare and other standards, and imports which are not produced to the same high standards as domestic production should be excluded.

We are not convinced by these arguments. Taking them in turn:

  • an open trading system provides powerful market signals which are necessary to steer "infant industries" in an effective direction in the first place. Providing over-generous infant industry protection can lead to long-term problems in facing up to world competition;
  • the strategic industries argument is overstated, and harks back to a period of naval blockades and supply shortages rather than today's increasingly open world trading system. History shows that markets are more successful than governments in determining which industries will succeed;
  • domestic political difficulties are real and need to be addressed, but are often based on effective pressure from concentrated producer interests, which contrast with the ineffectiveness of consumer ones, leading to false perceptions of the best economic course in the overall national interest;
  • differing standards in areas such as the environment and animal welfare, for example low standards for poultry production in some developing countries, can cause real difficulties for producers in importing countries. However, we think the remedy is in seeking agreement to common standards of environmental and animal protection rather than in taking unilateral trade action.

Arguments in favour of trade liberalisation underpinned the General Agreement on Tariffs and Trade (GATT), established in 1948 among 23 countries including the United Kingdom. GATT, which was incorporated into the WTO when the latter was established in 1995, provided a framework in which trade obstacles could be reduced, on a basis of reciprocity, by mutual negotiation.

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