From the Workshop of the EU, to the Workshop of the World: Britain Hears David Ricardo’s Cry for Free Trade?
Great Britain’s leave from the European Union in search of global free trade serves as a vindication to the excruciating work of David Ricardo, especially in his supportive theory of free trade and economic rents. Though the trading bloc of 27 other member countries offers a seemingly free market compiled of nearly 450 million consumers, it also imposes Common Customs Tariffs (CCT) and trade regulations on non-member countries. Though the EU is seemingly the definitive representation of free trade, at least to member countries, the exclusivity of the customs union would have irked Ricardo surely.
Britain’s leave can be attributed to two primary reasons which Ricardo projected. First, that the single economic market and customs union raised consumer prices in the UK through protection and business regulation; benefiting producers at the expense of the consumers. Furthermore, and probably more importantly, the mass movement of unskilled migrant workers to Britain supplied major producers with labor at the expense of consumers through taxes levied on the public to subsidize the migrants. A reoccurring theme throughout Ricardo’s work was that protectionism tends to hurt the economy overall, though helping a particular group. Ultimately, the UK proletariat was over with what Ricardo called the “stationary state” that began to epitomize the UK, that led them to utilize their democratic system to vanquish the “authoritarian project of neoliberal integration” which was progressing.
With the referendum officially complete, Prime Minister Theresa May, Brexiteers, and members of organizations such as the Economists for Free Trade (EFT), hope to transform Britain from the workshop of the EU to the workshop of the world – the future that David Ricardo hoped for. Cumulatively, they believe the UK’s optimal path is outside the Single Market and Customs Union, instead to move “toward an ultimate position of global free trade as a full member of the World Trade Organization”. Per the EFT, there exist two central aims for Britain’s transformation, both of which following Ricardian economic thought.
The first central aim toward global free trade, as stated by the EFT, is to pursue free trade in a global market with zero trade barriers for goods and services coming into the UK. Brexiteers and free-trade economists concur that unilaterally eliminating trade barriers will improve Britain’s economic position – through lower prices and higher disposable incomes – even if other countries choose not to reciprocate. Their belief is supported by Ricardo’s main idea in his chapter of New Ideas From Dead Economists: that “free trade makes it possible for households to consume more goods regardless of whether trading partners are more or less economically advanced.”
The result, per long term analysis by the Cardiff University, projects that obtaining a leading seat in the WTO could create a 4 percent gain in GDP and an 8 percent drop in consumer prices, compared to remaining in a single economic market. Though the assumed drop in overall trade is predicted to dip around 2019, the economic benefits from potential trading relationships will resurrect long-term growth.
The other aim of Brexiteers is to control the amount of unskilled immigration while promoting skilled immigration. Under EU law, “all member countries are required to grant citizens from member states basically the same right to live and work accorded their own citizens”. As an enticing destination for immigrants from around Europe, Britain has attracted 250,000 more member country citizens than have left the country since 2005 – which accounts for half of the nation’s population growth of around 5 million. Per economist Neil Mackinnon, each unskilled migrant in the UK costs £30,000 per year for a worker with a family, totaling approximately £7.4bn per year net as a result of welfare and other support not covered by tax contributions, which should be controlled according to Ricardo. Mainly because in a protected environment, economic rents emerge as populations grow. As he posited in his famous Principles of Political Economy and Taxation:
“When in the progress of society, land of the second degree of fertility is taken into cultivation, rent immediately commences on that of the first quality, and the amount of that rent will depend on the difference in the quality of these two portions of land.”
The idea, explained more plainly by Ricardo’s chapter in New Ideas from Dead Economists follows:
“When few people need food, they can raise enough by farming only the best land. As mouths multiply, farmers begin cultivating the second-best land. Because the second-quality land produces less, the owner for the better land can now charge rent. Wages and a normal profit on the second land will determine the price of grain. And since costs are lower on better land, a surplus exists. The landlord takes the surplus.”
Skilled migration, on the other hand, could be a very strong contributor to Britain’s economy if a visa system were promoted. The classical support for such visa system is that it could improve the collaboration and efficiency between the native businesses.
Despite the results experienced by Britain after the referendum, the departure itself does not serve as a vindication to the work of David Ricardo. The vindication comes from Britain’s intent to assume the role as a global free trade leader in the WTO, after experiencing a vital role in a crumbling single economic market. If Britain is able to effectively open their borders and promote global free trade, there exists outward and upward spiral potential. But if not, they could be just what Ricardo feared – an insular and protectionist island. As Ricardo’s chapter in New Ideas from Dead Economists posits:
“When economies turn inward they almost always turn downward; that there is no such thing as an inward and upward spiral in economics.”