26 March 2021

‘Buy British’ might be good politics, but it’s lousy economics

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There is a strong intuitive appeal to calls to “Buy British”. What patriot could possibly demur? And as the Government urges that all government buildings fly the Union Jack and retains strong support in newly won northern constituencies, you can understand why the Labour Party would wish to burnish its own credentials as the party of the flag and of manufacturing. This week it has called on the Government to give a commitment to buy British steel for big infrastructure projects and power stations. Lucy Powell, the shadow minister for business and consumers, said that tougher “Buy British” guarantees in procurement notices would increase the benefits to the UK of infrastructure spending.

Unfortunately, it’s a really bad idea. Labour’s plan seems to be modelled on President Biden’s executive order, signed as one of the first acts of the new administration, imposing “Buy American” rules in US federal government procurement. Mr Biden is, however, not the originator of this policy. He is simply following, and indeed amplifying, the approach of Donald Trump. And the model for both of them is the Republican Herbert Hoover, who on his last full day as president in 1933 signed the Buy American Act, directing that federal procurement programmes should buy domestic goods.

What’s wrong with that? Well, quite a lot. The typical form of “buy national” programmes is to require that preference be given to domestic goods unless they are a certain (always generous) proportion more expensive than their imported equivalents. This guarantees that taxpayers will pay more than they need to for government projects. The same will be true of Labour’s proposals for British steel. Or, to put it another way, government budgets will buy less steel than they otherwise would.

Meanwhile, economies far larger than the UK will continue to engage in big construction projects once the current crisis has receded. British manufacturers will be at a competitive disadvantage if the governments of, say, China or India adopt similar policies.

The approach that the Biden administration and Labour appear to be adopting is known as import substitution. It appears commonsensical, by guaranteeing and preserving domestic jobs, but it always has costs and these are generally hidden. It is a brave politician who will declare what every trade economist knows but that business leaders rarely articulate: imports are a benefit, not a burden, and trade is a positive-sum rather than a zero-sum game.

You almost always hear it the other way round: the idea that the role of government is to promote exports and that a current account surplus is a desirable policy aim. But, on the contrary, imports provide consumers with a greater range of goods and services, at lower prices. The same is true for domestic companies that rely on intermediate goods. Exports provide the means of enjoying these benefits. Import substitution is an economic hindrance, not a route to prosperity. Moreover, the competitive pressures that are stimulated by imports force domestic producers to up their game.

In reality, the policies of domestic preference in big infrastructure projects are vulnerable to World Trade Organisation rules. These projects are governed by the market access requirements of the WTO’s Government Procurement Agreement. But the political signal given by Labour is all wrong. Sadly, both main parties are exploring policies of import substitution in the post-Brexit age. It will prove a dead end.

Even the very concept of “Buy British” has a chequered history. In the deep economic crises of the 1970s, the Labour government of James Callaghan gave serious consideration to adopting this message and communicating it to voters, as a way of stemming imports, but wisely decided against it. The reason was eminently pragmatic: the government feared that such a campaign would merely draw attention to the inferiority of British-made goods. (The sub-standard and even unsafe cars produced by British Leyland, which ate up government subsidies, were notorious.)

The Conservative government of Margaret Thatcher had no such diffidence, however. In 1982 it passed legislation requiring that textiles and footwear, cutlery and electrical appliances be clearly marked with their geographical origin, to encourage shoppers to buy British. It was a shameless piece of protectionism that the European Court of Justice ruled illegal because it was a non-tariff barrier to trade.

Among the reasons (though it was far from the most important) that I voted Remain was my certainty that Brexit would not serve the cause of openness and free trade, and that the single market that Mrs Thatcher signed Britain up to was a triumph of economic liberalism. That debate has now been settled for at least a generation, and my side has lost it. But in the meantime, both wings of politics need to relearn the benefits of internationalism and commit to eradicating barriers to trade, whether tariffs, quotas, subsidies, rules of origin or anything else. I fear very much that the opposite trend is prevailing.

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Oliver Kamm is a columnist and leader writer for The Times.

Columns are the author's own opinion and do not necessarily reflect the views of CapX.