Free trade and unlocking prosperity

Business Secretary Sajid Javid discusses the importance of free trade and sets out his vision for trade across Europe and around the world.

Free trade

In every country it always is and must be the interest of the great body of the people to buy whatever they want of those who sell it cheapest.

It’s well over 200 years since Adam Smith published those words.

But any modern inquiry into the nature and causes of the wealth of nations would come to a similar conclusion.

Whether it’s cars, clothes or Christmas trees, nobody likes paying over the odds for something.

And, thanks to global trade, they rarely have to.

International trade lets us bring in everything from iPhones to bananas.

And it lets British companies find customers around the world, even selling wine to France and boomerangs to Australia!

Although it’s possible we’re just exporting the same boomerang over and over again!

From the Silk Road to the East India Company to the World Trade Organisation, the complex web of international markets has evolved over many centuries.

But while the goods being traded and the nations involved have constantly changed, one thing has remained constant.

Global trade lets people around the world access what they need at a price that they can afford.

Of course, it’s a 2-way transaction.

The buyer gets what they need and the seller gets paid.

No exchange takes place unless both parties benefit

as another great economist once said.

That’s why the spread of free trade has done so much for the world.

Over the past few decades the rise of free trade has been one of the most significant drivers of both economic growth and international development.

Free trade has raised living standards around the world.

It has created jobs.

It has fuelled aspiration.

It has allowed nations and individuals to achieve incredible things.

It has even helped to break down barriers, to spread democracy and open up societies.

In 1945 North and South Korea started from a very similar base.

But in 2015 they are in very different places.

Seoul looked outwards.

It embraced free trade and global markets.

And today it is a thriving democracy.

One that offers its citizens an exceptionally high standard of living.

Meanwhile, Pyongyang turned ever further inwards.

It’s now one of the least free and most destitute societies on earth.

On Monday I spoke at the Legatum Institute about the importance of defending capitalism.

I said that if you really care about the poor, if you really want to see sustainable international development, then the best thing you can do is support the spread of the capitalist system.

The same applies to free trade.

In many ways it’s the international expression of capitalism.

The way it grows from a domestic system to a global one.

Almost by definition, it’s not possible for a closed, state-planned economy to trade freely with its neighbours.

And yet, just as with capitalism, free trade itself is facing a wave of public hostility.

After the Second World War ended, the boat bringing in the first shipment of bananas for 5 years was met on the dockside by excited children.

The arrival of the cargo was practically a cause for national celebration.

It didn’t just mean that people could enjoy a fruit that had been all but banished from their shelves since 1940.

It was a sign that the seas were once again open for freight, and that Britain was once again open for business.

International trade was back, and with it came the luxuries people had previously been forced to go without.

Today, the perception of international trade is very different.

For many people, ‘free trade’ doesn’t mean the iPhones in the pockets, the food on their table or the shoes on their feet.

It doesn’t mean the cars that they drive, the planes they fly on, or the jobs that keep a roof over their heads.

Instead, we have this absurd idea that ‘free trade’ means children toiling in Asian sweatshops.

That it means African farmers being paid a pittance for something that will be sold as a premium product.

The developed world ruthlessly exploiting emerging economies, sucking them dry for our selfish benefit.

The same is true of the World Trade Organisation.

In the real world it’s an arbiter of free commerce.

A force for good that lowers prices, raises incomes and even stops wars.

Yet for many, it’s the embodiment of the machine against which anti-capitalists rage.

A sinister cabal of wealthy nations.

One that puts profits before people, conspiring behind the scenes to milk the developing world.

Of course, it’s a naïve misconception.

But it’s one that’s proved persistent over the years - as the demonstrations that typically greet a WTO summit’s arrival show.

It also helps to explain the antipathy towards free trade agreements.

Again, they’re often seen as something designed solely to benefit the elite.

But the truth is very different.

Just look at the EU’s free trade agreement with South Korea.

In the 4 years since it was signed, the value of UK exports has more than doubled.

We’ve seen a 1,000% increase in the value of jet engine sales.

One thousand per cent!

The UK sold just 2,315 cars to Korea in the final year before the FTA was agreed.

Last year, that number reached 13,337.

And it’s not just big companies that benefit.

One Scottish business was able to sell 100,000 jars of jam in Korea last year after the FTA slashed import duties.

All that from just one free trade agreement with one country.

If all the FTAs currently being negotiated by the EU and UK are agreed, they could boost UK exports by up to £40 billion.

That’s equivalent to almost £1,500 for every household in the UK, every year.

Chief among the agreements is the single biggest free trade agreement of our age: the Trans-Atlantic Trade and Investment Partnership, or TTIP.

It’s an unwieldy name for something that is simply an FTA between the world’s biggest trading bloc and the world’s biggest economy.

And that’s all it is.

Despite some of the alarmist headlines, it’s not a threat to the NHS.

It won’t allow shadowy corporations to ride roughshod over the rule of law.

It won’t remove the hard-fought environmental or workplace safety regulations that make Britain such a great place to live and to do business.

Yes, it’s a big piece of work, yes it’s very complicated.

That’s why we’re going through it with a fine-toothed comb, making sure there are no unintended consequences.

And that’s why we welcome feedback and constructive criticism.

I’m not afraid of hearing opposing arguments, in fact they help us to make the agreement as good as it can be.

But while people are entitled to their own views, they’re not entitled to create their own facts.

Yet that’s exactly what some critics are doing.

[Political content removed]

It’s time such hysterical criticisms were laid to rest.

The EU and UK already have plenty of free trade agreements with nations around the world.

Yet not one of these agreements has led to our NHS being privatised or imperilled.

There’s a world of difference between removing economic barriers and removing standards.

Previous FTAs have actually improved standards around the world, as economies are forced to level up to the high standards that we demand here.

For more than 40 years the UK has been part of the biggest, most ambitious, most integrated free trade area that has ever been created, the European Union.

Our membership has not led to German health providers privatising the NHS. When Bulgaria and Romania joined the European Union we didn’t suddenly lower all of our health and environmental standards to meet those that were in place at the end of the Communist era.

The Investor State Dispute Settlement: it might sound scary.

But we already have almost 100 such arrangements in place as part of bilateral trade agreements.

They’ve been used entirely legitimately since the 1950s without any problems.

If anything, the system needs updating to better reflect the modern world.

And that’s exactly what TTIP will do.

And, contrary to what the critics say, the agreement is not being forced through in a secret, undemocratic way.

TTIP has been debated by MPs at least 5 times already.

The final agreement will go to Parliament for scrutiny and further debate.

And it will be signed off not by anonymous Brussels bureaucrats but by the heads of EU governments.

And I can tell you now that our Prime Minister won’t be agreeing to anything that is not in the best interests of the British people.

A lot of the criticism seems to come from people whose views of global trade are stuck in the past.

The sort of people who still think it’s all about country ‘A’ making a product, putting it in a shipping container and then sending it to country ‘B’.

But in 2015, the trade in finished goods is becoming relatively less important.

Supply chains have become just as global as the marketplace.

Components made in China are used to build an engine in the UK.

That’s put into a car assembled in Germany.

And that’s sold in the USA.

There’s also an unprecedented international market in services.

According to the OECD, the service sector now contributes 50% of total exports in the UK, US, France, Germany and Italy.

And the market is growing.

The growth in trade in services, investment and data will play to the UK’s strengths.

We run a complex economy.

We are strong in services, investment and the kind of high-value manufacturing, such as pharmaceuticals, where regulation really does matter.

So we don’t just need access to markets as we did in the past.

We need to set standards, high standards, for complex products.

And we need access to markets for our services – our business services, our financial services and more.

TTIP will help deliver this with the USA.

And we want the EU to focus on delivering it within Europe.

Because Europe has the potential to be a world-class, world-beating, deeper, broader single market.

And when I say ‘a single market’, that’s exactly what I mean.

Not a customs union.

Not an agreement to lower or remove tariffs on certain key sectors.

But a single market with a common set of standards in which all goods and services can be freely traded.

Because the primary purpose of the EU has always been its common market.

That’s its main selling point.

It was a common market that Ted Heath joined in 1972, and a common market that the British people voted to remain in 3 years later.

Not a European super-state.

And I think it’s what the vast majority of British people want today.

A common market that lets us trade freely with other member states.

Because a common market breaks down economic barriers with our neighbours.

And it brings the collective strength of 28 countries to the negotiating table when dealing with threats and opportunities.

There are, undoubtedly, huge benefits to be gained from a functioning single market.

But to fulfil its potential, the EU’s common market has to reflect the modern world of trade in services, particularly digital ones.

I’ve already talked about how trade has changed, yet the EU seems to be stuck in the past.

It is immensely frustrating that, in 2015, we still don’t have a digital single market.

That we don’t have a capital markets union.

That there is no single market in services.

These are sectors in which British businesses excel.

And these are sectors in which British businesses are suffering through the lack of Europe-wide competition.

We’re doing what we can to address this.

For example, the UK has been at the forefront of sketching out what a digital single market should look like.

We want customers to be able to take their Netflix accounts with them when they travel.

And for a digital start-up in Leeds to be able to sell its services in Ljubljana.

But we need the EU to pick up the pace and get these measures off the drawing board and into the marketplace.

The European Union has the potential to be the greatest, strongest, most successful single market in the world.

But only if it actually gets on with the job it was created to do.

Right now, it seems that EU trade discussions mirror the traffic on Brussels’ Schuman Roundabout.

All too often, nothing moves at all.

And when it finally does get going, we just go round and round in circles.

Our referendum will help to change this.

Demanded by the people, passed by Parliament, and guaranteed to happen by the end of 2017, the vote gives us an unprecedented opportunity to deliver the change Europe needs.

Now, there are key parts of the financial services industry that have expressed concern about the consequences if we were to leave the EU.

And of course I understand that.

But everyone agrees that the European Union is in dire need of reform.

Because without it, nobody can say where continued membership will take us.

Nobody can foresee what “ever-closer union” will mean for British businesses in the years to come.

Nobody can predict what new regulations will be forced upon us.

That’s why this renegotiation is so important for Britain.

And make no mistake, we are only at the negotiating table because the Prime Minister called an in/out referendum.

Like any big bureaucracy, the European Union has an inherent resistance to change.

The referendum shows that we are serious about reform, serious about free trade, and serious about bringing the single market into the 21st century.

And as the Prime Minister has said, if necessary reforms cannot be achieved then we will rule nothing out.

So here’s what international trade means to me.

Higher standards of living around the world.

More jobs here at home.

And a stronger, more resilient economy for all of us.

The benefits are almost unlimited, but to fully enjoy them trade has to be 2 things.

First, it has to be free.

Free trade means bringing down the barriers, whether within Europe or the rest of the world.

Because protectionism is short-sighted.

It stops exports, it kills jobs, and its takes money out of the economy.

To use Hazlitt’s example, you put a tariff on sweaters to keep out cheap foreign imports and the sweater-makers will celebrate.

But what about the shoppers who now have to spend more on clothes?

Unless their incomes have seen a corresponding rise, they’re going to have to spend less money on something else.

And of course the country you used to import from would likely retaliate with tariffs – something that will costs exports, jobs and growth here at home.

Second, trade has to be fair.

Because the system only works if everyone is playing by the same rules.

Whether dumping steel at artificially low prices from outside the EU or applying unlawful state aid within it, we have to act when people and nations attempt to game the system.

If we fail to enforce the rules – whether through the WTO, the EU or any other appropriate body – we won’t just lack a level playing field.

It’ll be more like the opening batsman arriving at the crease only to discover that the other team is playing football.

Pitt the Elder, 1 of the 3 Prime Ministers to have called Chatham House their home, once wrote:

When trade is at stake, it is your last entrenchment; you must defend it, or perish.

Now, world trade is changing as never before.

New technology and new ideas have revolutionised the way we do business and opened up a whole new world of opportunities.

If Britain is going to keep its place at the top table of world trade we have to recognise this and we have to react to it.

And that’s exactly what this government is committed to doing.

But we don’t have to do it alone.

Our EU partners can help to break open complex markets overseas, and to acknowledge the weaknesses of the common market.

They can work with us to address them, so that the UK and Europe continue to enjoy all the benefits that free and fair trade bring.

If we don’t, our rivals will.

And when trade is at stake, it is your last entrenchment.

You must defend it, or perish.

Published 19 November 2015