Why trade matters

Professor Tim Benton, Research Director, Chatham House and University of Leeds
Professor Fiona Smith, School of Law, University of Leeds

Trade matters. How we trade with the rest of the world tells us something about who we are and what we value. Yet trade discussions all too often get stuck in detailed analysis of regulations, tariffs and standards. Myths circulate about the extent to which organisations like the World Trade Organisation (WTO) can impact our lives. We need to move beyond discussions about the mechanisms that facilitate trade and ask more fundamental questions about the lives we want to live. 

 What do we want to bring into the country to give us more choice? What standards and values do we want to maintain? What compromises are we willing to make? What makes us stand out on the world stage? As citizens, what are our red lines? 

We are at a crucial moment in the UK’s relationship with the world, and yet there is very little conversation happening among citizens.  

Join us in this series, as we show why trade matters, and why it is important to you and your family. How it affects your everyday lives, and why thinking about trade is important for all of us both now and in the future.  

Trade is good, right? 

Trade happens for a number of very good reasons. Just as most of us have improved our quality of life by specialising in a role, getting paid for it, and using the income to buy what is too difficult or time consuming to make, trade fulfils the same purpose internationally. In a stable world, countries can specialise in what they can do really well, using their ‘comparative advantage’ to export it to countries and earn income to buy in things we are less good at producing, or which we cannot produce at all. Trade gives us much greater choice and flexibility than if we were self-sufficient, only consuming what we can produce at home: we export wheat and buy in bananas. We can import goods from places where they have a better climate, or land, or cheaper labour, and it is therefore cheaper in the shops than if we relied on home supply. In addition, the more global trade there is, the more competition there is so trade itself provides downward pressure on prices. 

On the export side, trade means our producers can sell to new markets, even if there isn’t one at home. Our uplands raise more sheep than we eat domestically, so hill farmers benefit by selling into Europe, where the climate doesn’t suit sheep production like ours does. Scotland produces far more whisky than the UK can drink. Each export enriches producers, creates jobs, supports local communities, and provides tax revenue for society. 

Another important plus for trade is that it can act as a safety net. If the production of goods varies from year to year, trade allows the movement of goods from areas of surplus to areas of deficit. If the UK weather is bad and we produce less high-protein flour, we import more wheat from Germany or Canada to make our bread. Trade also creates some resilience: if a supplying country can’t sell us the produce we want, another will be able to. 

Trade also has more intangible benefits: it allows technology to be shared across the world. The dramatic fall in the price of renewable energy is partly driven by China’s investment in scaling up solar panel production and efficiency. It can also serve as both a carrot and stick in international relations. A country might say “we will open our markets to you if you do X, Y or Z” – where X, Y or Z might be improve labour or animal welfare, conditions, reduce environmental impacts or adopt more accountable forms of governance.  

Trade has downsides 

The downside risks mirror the benefits outlined above. By increasing consumer choice and reducing prices on imports, it drives increased consumption. However, on a finite planet, with finite metabolisms, increasing consumption can have impacts on both the environment and our dietary health. Having access to an excess of calorie-rich, cheap processed food, rich in imported sugars, starches and fats increases the costs levied on the NHS. Cheaper goods also lead to a reliance on ‘fast’ goods – like fast fashion – where items are briefly used and then thrown away. With ever-cheaper goods, it becomes economically rational to create waste. 

Global competition drives efficiency of production, but also creates an incentive for producer countries to use the environment, or people, to subsidise production. This leads to pollution – of land, water and air – climate change, exploitation of low-paid workers, and impacts on animal welfare. Biodiverse rich habitat, like tropical forests, pay little into national coffers, whereas soya or palm oil plantations do. 

Such global competition also creates the potential for a ‘race to the bottom.’ If some countries are pushing the real costs of production onto the environment (‘externalising’) and not insisting their companies pay to protect the environment (or labour or animal welfare), it makes it difficult for countries with higher environmental (or animal welfare or labour) standards to compete. This undercuts local producers. A key worry about post-Brexit trading is whether new relationships will undercut UK standards, driving the intensification of the UK agricultural landscape, the adoption of genetic technology or lower animal welfare standards, and impacting the rural economy, particularly by affecting the livelihoods of smaller scale, more traditional, family farms. 

So in sum, trade is widely accepted to be positive for consumers of goods, reducing prices so we can afford to spend less and buy a wider range goods, increasing overall consumption and driving the economy and income for producers. However, trade can drive overconsumption which has a negative impact on health and the environment and can lead to lower standards in a ‘race to the bottom.’ So how can decision makers use trade policies to bring about the future we want for our society? Join us as we explore these complicated issues in this series.  

Food prices and the Arab Spring 

Whilst trade provides resilience in the face of some disruptions, offshoring of goods absolutely required for society to function – like food – also creates risks in the face of other disruptions. Famously, the food price spikes of a decade ago, were created when a series of events and policies conspired to create a run on the markets, as supply was perceived to fall short of demand. This price amplification was fuelled by some countries putting in place export bans. 

In the end, world food prices increased, and people suffered – by trading down and going without. The food prices sparked the Arab Spring, marked by anti-government uprisings and armed rebellions leading to wider-geo-political ramifications that affect Middle Eastern stability today.