What makes trade free?

17 March 2005

A regular complaint about the EU, in the comment section of this blog and elsewhere, is that it is unnecessary. All that is needed is free trade, we read, and the EU goes too far beyond this.

Let’s leave aside for the moment all the ways in which the EU might benefit its citizens other than by trade – environmental protection, a voice in the world and so on – and just think about trading. Is the EU really necessary?

The classical idea of free trade is that companies in different countries can trade with each other as easily as companies within the same country. The national borders between them should not obstruct or limit trade. (I leave aside the variations in language and consumer taste, about which governments should do nothing, and the possible environmental implications, which governments should address by means of taxation in order to attach a price to any externalities.)

The question that this idea of free trade throws up is why national borders should ever obstruct or limit trade. The question is not why trade is ever free but rather why trade is ever not free.

The reason for this is that governments intervene to make trade not free, and national borders are their opportunity to do so. They can impose tariffs (a tax on trade, to you and me) as a means of raising revenue and attempting to protect domestic industry. In addition to these tariffs, they can also impose non-tariff barriers, in the form of quotas, differential product standards, or protracted and excruciating customs procedures. All of these can be used to keep foreign products out.

Now, if you believe in national sovereignty, you have to accept that foreign governments have the right to behave in this way. You may think they are stupid and acting contrary to their own interests to do so, but you grant yourself no right to complain.

Within the EU, on the other hand, there is the general recognition that this kind of government practice is bad for prosperity and bad for the citizens. The 1930s, about which I have written before, were marked by the sudden erection of new trade barriers by national governments in the forlorn attempt to gain advantage over one another. The result was that they were all worse off. The EU was founded in reaction to the experiences of the 1930s and has acted to abolish such government-inspired barriers to trade.

First to go were the tariff barriers; abolishing them was quite easy. The non-tariff barriers, which could be just as insidious an obstacle to trade, were tackled in the Single European Act of 1986 and the legislation that followed on from that. The process still goes on.

National governments have been deprived of the right to protect domestic economic interests by inventing reasons to keep out foreign products. Speaking as a consumer who likes to buy foreign products, I think this is a good thing too.

It is controversial, because eliminating non-tariff barriers means amending domestic legislation. Unlike dealing with tariff barriers, it is a fight not limited to the borders between nations but has to be dealt with throughout the economy. It is no accident that the down-turn in the popularity of the EU started once the Single Market programme was underway, once people started to feel the impact and the consequences of European legislation without properly understanding the reasons or the processes behind the legislation. (This is the famous democratic deficit.)

Even if it is accepted that the EU is entitled to construct common product standards for the Single Market, it can be argued that the EU’s rules go beyond what is strictly necessary for that purpose. The British Conservatives like to argue this, for example. It is an argument that, at first sight, has some merit but closer examination reveals a different picture.

For there is no single definition of “what is strictly necessary”. It is a political idea, not an objective fact, and different people will bring different interpretations to bear. The process of political decision-making within the EU is a means of putting these different interpretations up against each other to produce a generally acceptable outcome. The fact that any individual outcome might not be to my taste does not imply that the whole system is wrong. The British Conservatives object to many policies of the Labour government, too, but they do not go on to argue that the foundations of the British constitution are therefore flawed.

I agree with those people who say that free trade is, in principle, preferable to trade that is not free. But I argue that free trade is not the state of nature – governments intervene if they can to prevent it. Free trade is therefore the product of a conscious political act, an act that at the international level consists primarily of preventing governments from intervening on behalf of domestic interests. It will never be established perfectly or completely – I have certainly never said that the EU is either perfect or complete – but nevertheless the economic supranationalism of the EU is a step towards it and not the opposite.

This blog entry first appeared on www.yes-campaign.net. The opinions expressed are those of the author and not necessarily those of Federal Union or of the Yes campaign.

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