The Government’s latest idea to help British businesses is to offer tax breaks to companies which buy products or services from British firms.
While such flag-waving policies have a superficial appeal, they add up to little more than what we might call ‘murky protectionism’ – they undermine global trade and discriminate against foreign firm without directly violating WTO rules.
Calls to give preferential treatment to British businesses have grown louder over the course of the pandemic, and it’s worth pointing out that Boris Johnson has been publicly considering changing procurement rules in order to favour UK companies since he ran for the Tory leadership in 2019.
But they are fundamentally poor economics. Adam Smith argued in his Wealth of Nations that whilst we could grow grapes for wine making in Scotland, doing so would divert investment away from producing what Scotland is actually good at, and at greater value for money. Far better, then, to rely on specialisation and free trade to get the best results – and let Scots buy French wine at a thirtieth of the price.
In much more recent memory, attempts at protectionism have consistently fallen flat. For example, President Obama’s American Recovery and Investment Act (2009), which forced companies to buy steel and iron from US producers, did little to help the American steel industry, drove up prices for consumers, and had to be watered down due to fears of a trade war with China.
Even if incentivising discrimination against non-British companies doesn’t provoke retaliation from other countries and, indeed, the WTO itself, taxpayers are likely to end up paying the price. The Chancellor can frame this as a popular tax break all he likes, but it would effectively function as a subsidy to British businesses. We know that subsidies overall make businesses less competitive and less efficient, as they favour firms which would otherwise not be competitive enough to succeed in a global market.
It’s also important to remember that calls to ‘Buy British’ aren’t a recent development. In the 1970s, the then Labour government considered launching a policy campaign to this effect, and commissioned a confidential consumer survey. However, the survey found that price and value for money were the most important factors when shoppers were deciding what to buy, not country of origin. The Government sensibly concluded that pushing a ‘Buy British’ policy would do little to improve the economy – what was really needed was far-reaching structural change to the business environment.
These are the very same conclusions which our current government should be drawing. Rather than dabbling in protectionist measures and further unnecessarily complicating the UK’s already hefty tax code, it needs to reverse the current message that Britain is not a good place to do business. This should include rectifying our terrible approach to taxing business investment in general, through replacing the super-deduction with a long-term full expensing policy, allowing businesses to deduct the full value of their investments from their tax bill immediately.
We’ve all seen the OECD’s dire forecasts for the UK economy. The Chancellor should remember this basic principle; the richest and most dynamic countries are those open to all the benefits that free international trade brings.
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