Daniel Hannan: Sadly, only poverty reliably teaches nations the value of free trade

Lord Hannan of Kingsclere was a Conservative MEP from 1999 to 2020 and is now President of the Institute for Free Trade.

These days, vibes matter more than facts. This suits protectionists, who tend to be driven by aesthetic rather than empirical considerations. They don’t like cheap goods; they don’t like multinationals; they do like horny-handed steel workers – or, at least, they admire them from the outside (you rarely see them pushing their sons into such jobs).

Can I be so glib in dismissing the intellectual arguments for protectionism? Yes. Supporters of tariffs make a series of claims that are not only false, but are logically incompatible one with another.

Trumpsters in the US, and their copycats here, argue that tariffs will create jobs, bring in revenue and force other countries to open their markets. Every one of those claims is false: tariffs destroy jobs by making them more expensive; the hit to the economy means a greater loss in tax revenue than any cash they bring in; and they are a terrible negotiating tool, because they mainly hurt the country that imposes them.

But never mind all that. As a matter of simple logic, if one of those claims were true, the other two could not be. If tariffs brought manufacturing back, they would be keeping imports out, so no revenue; if, on the other hand, they were raising revenue, they could not be reshoring jobs; and if they were a way to get other countries to drop their own trade barriers, then they would obviously be doing neither of the other things.

The readiness of tariff advocates to skip back and forth between these contradictory positions suggests motivated reasoning.

Now motivated reasoning is what most of us do when confronted with an unfamiliar subject. We have a rough sense of what feels right, and we subconsciously fit the facts around it. We lead with our opening hunch, and our opening hunch is usually protectionist. Mine certainly was, until I read some economics.

More than two hundred years have passed since David Ricardo proved, as a matter of maths, that free trade benefits the weaker as well as the stronger participant. When I first came across his thesis, I had to read it through again, convinced there must be some flaw; but there is none. If you haven’t yet discovered Ricardo’s counter-intuitive insight, and if you have seven spare minutes, please watch Don Boudreaux’s brilliant explanation here.

Nowadays, people dismiss Ricardo with phrases that unwittingly reveal that they have never read him. “Ricardo did not imagine services replacing manufacturing!”; “Ricardo’s theory only works if the other side reciprocates!”; “Ricardo did not foresee the huge differences in salaries in today’s world!” (He literally did; he called it the “pauper labour” fallacy.)

We are almost all protectionists until we look into it. Some people, of course, don’t look into it, sticking with their gut instincts. This, I think, is what PJ O’Rourke was getting at when he called free trade a question of IQ rather than ideology.

But free trade is not only, so to speak, prosperogenic; it is also eirenic, meaning that it tends to encourage peace. It reduces both the incentive to wage war (without barriers, it doesn’t matter where resources are) and the capacity to sustain it (a bellicose country can be deprived of critical materials).

This consideration, more than any other, motivated the original campaigners. Said Richard Cobden in 1850:

“Do you suppose that I advocated Free Trade merely because it would give us a little more occupation in this or that pursuit? No; I believed Free Trade would have the tendency to unite mankind in the bonds of peace, and it was that, more than any pecuniary consideration, which sustained and actuated me.”

Cobden was right. While no one has found a way to eliminate war completely, globalisation has a pacifying effect, because countries like to remain on good terms with their customers. In 1860, Cobden signed the modern world’s first trade agreement with his counterpart, Michel Chevalier, a rare French classical liberal. Since then our two nations, which had spent the previous six centuries in a state of semi-permanent war, have not fought.

Cobdenism began to run out of steam in the early Twentieth Century as challenges to British power led to calls for retaliatory tariffs. The horrors that followed – two world wars, the Holodomor, and the Holocaust – were products of the end of the Victorian economic order.

By 1944, there was a recognition that protectionism, autocracy and war were interconnected. The Allies grasped that the dictators had been products, as well as supporters, of autarky, and set up the General Agreement on Tariffs and Trade (GATT) to ensure that the world did not slide back into beggar-my-neighbour mercantilism.

“The whole world is concentrating much of its thought and energy on attaining the objectives of peace and freedom,” declared President Truman in 1947, the year that the GATT came into effect. “These objectives are bound up completely with a third objective: reestablishment of world trade. In fact, the three – peace, freedom, and world trade – are inseparable.”

Truman, too, was right. As the barriers came down over the next 75 years, we saw not only a global enrichment beyond the dreams of previous generations, but an unprecedented decline in the number of wars. The relative stability of the Victorian age had rested on the Pax Britannica; that of the post-war boom rested on the Pax Americana. When American power surged after 1989, so did peace and prosperity.

Then came the banking crisis, a fall in world trade and, before long, a return to protectionism – a process accelerated by the pandemic.

“Trade wars are good and easy to win,” declared Donald Trump as he ordered tariffs on Chinese imports. Joe Biden accelerated America’s retreat into autarky, notably through the disastrous (and comically misnamed) Inflation Reduction Act, a classic piece of protectionism disguised as greenery. The EU is now pursuing a similar scheme.

China’s leaders are determinedly building their own versions of the global companies that withdrew from Russia in 2020. Xi has made clear that he does not want to depend on imports. “You should not rely on international markets,” he told his rubber-stamp parliament when Russia blockaded Ukrainian exports. “China must depend on itself.”

His solution? To reserve 296 million acres of agricultural land for food production – precisely the kind of policy that caused the breakdown of the 1930s.

It seems we need to make the case all over again. Last week, the Cobden Centre published a collection of 36 essays, some by Nobel Laureates, some by former prime ministers, some by academic economists, some by trade negotiators. Free Trade in the Twenty-First Century will, I hope, stand for some years as the ultimate statement of the case for a liberal world order.

But let’s not kid ourselves. We are losing ground. No essays, however powerful and logical, make headway against intuitions, aesthetics, vibes. Only poverty will teach us that lesson, sadly.