“Free trade” is frequently treated as synonymous with international trade. In principle it does not have to be restricted to international dealings because the concept may be applied to any market, whether that be within a global, regional, national or even a local context. The United States for example displays considerable differences in local tax rates between not only states but within localities within a state, and, indeed, the ultimate aim of the “free trader” is to create a single world market. However, there are considerable differences in practice between domestic markets and international markets, not least because the criteria which are deemed to fall within the concept of “free trade” are not identical with those which are said to be a necessary part of the concept of a “free market”, for example, laws to prevent monopoly are redundant when it comes to international trade because one country will either supply or not supply goods and services to other countries and a country with a monopoly of an important good or service can as a matter of fact only be persuaded to supply the good or service against its will by extra-legal action, ultimately force or the threat of force. Consequently, it is convenient to treat “free trade” as being economic intercourse between nation states and that is what I shall do.
What does and does not constitute “free” international trading? In times gone by, people would have pointed to those honest workhorses of restriction: embargoes, quotas and tariffs and navigation laws and not much else. But in the modern world things are much more complicated as we discover almost daily during the seemingly interminable EU squabbling and the GATT rounds.
Some things are obviously incompatible with “free trade” such as embargoes or state subsidies, but what of different tax regimes, welfare provision or labour regulations? Why should they be excluded from the things which should not be tolerated in a “free trade” regime? After all, a low company tax regime could be regarded as a form of state subsidy to business and all welfare provision could be regarded as a subsidy to wages.
But even such items are straightforward compared to others. What of national sentiment which gives a preference to home produced goods regardless of whether they represent the best value when judged purely by price and quality? Should a country be forced to take the cheapest of any particular equivalent good or service, regardless of the wishes of the people of that country, on the grounds that not to purchase that which gave “best value” constituted “unfair competition”? A reductio ad absurdum? Well, consider the fact that public bodies within the EU which for these purposes includes any organisation drawing part of their income from public funds) must allow any company within the EU to bid for any work put out to contract, and if the lowest bid is not accepted, the public body risks being fined for a breach of the Single Market rules.
Even more problematic are things which are simply effects of economic activity. Take true dumping, not the state subsidized export regimes which often pass for such, but a simple economic practice to maximise profit.
True dumping works like this. Imagine that a company can make 2,000 units a week. It covers its costs for all 2,000 units if each week it produces and sells 1,000 units at £1 each. The company finds it can sell a maximum of 1,500 units in the home market at œ1. If it reduces the unit price to 75 pence it could sell all 2,000 but that would only produce the same amount of revenue as selling 1,500 at £1 each. Consequently, it sells 1500 in the domestic market at £1 each and the other 500 at 50 pence each (carriage paid by buyer) in foreign markets. Total sales are £1750 instead of £1500.
That is a very simple model of dumping but something akin to it happens regularly with differential pricing from country to country (the European car market is a prime example of this). No state subsidy has been given, no state intervention of any sort has occurred. Why should it not be considered as reasonable a practice as the toleration of different national wage rates? In fact, why should it not be considered more reasonable because wage rates are directly linked to such hidden subsidies as those of welfare and low company taxation? (in fairness, the economic activity of the dumper would also be linked to wage and tax subsidies, but the connection would be more remote.)
Most contentious perhaps is the question of immigration. Does “free trade” require the movement of people as freely as goods and services? This is generally accepted as self-evident by purist “free traders”. Yet there is no logic to the claim. Economic forms are made for men not men for economic forms. We know as a matter of practical experience it is possible to have the exchange of goods and services without the mass movement of people. If a society decides that the benefit gained from the free movement of people is outweighed by the social disruption caused by such migration, it is a perfectly rational decision. A people may decide that they will have or not have free exchange or movement just as they may decide to have this or that level of taxation or welfare provision. It makes no more sense to say a society which restricts immigration – which all advanced states in practice do – is not a “free trader” than to say they are not a “free trader” because their income tax rate is higher or lower than that of their competitors.
The treatment of human labour as merely a factor of production (along with land and capital) is also incompatible with the liberal democratic tenets of the equal worth of each person and the rights and obligations of citizens. Allowing mass immigration to reduce wages or the exporting of jobs to cheaper labour overseas is treating human beings as being of no more account than inanimate objects. It is inhuman.
So what does “free trade” actually mean? Does it require merely that countries may trade with one another without any formal barriers such as tariffs and quotas? Or should it take into account all those items such as national tax regimes, non-tax fiscal measures, wage rates (where these are set by the state), standards of practice and manufacture (official and otherwise), and the size of the public sector. All of these are controllable either entirely or to some degree by men. In other words, they could be removed or altered.
If a definition of “free trade” is accepted which includes these and other non-traditional elements of market distortion, the ultimate logic of the definition is that “free trade” as a global concept cannot exist until all peoples and countries are reduced or elevated to the same general economic condition.
Those who run the European Union would say that is precisely what is required, at least within the EU. But the experience of trying to create unified trading conditions at a supranational level in the most advanced of supranational political and economic entities, demonstrates just how difficult it is to create a supranational market in which there is a broad uniformity in the trading conditions within its constituent national parts. Despite nearly half a century of trying through treaty after treaty and the covering of the EU members with an avalanche of EU directives, there is no meaningful economic uniformity within the EU, either in the circumstances of private enterprise competition or in the function of the state. The introduction of the Euro has painfully revealed exactly how disparate the economies of even the richer EU states still are with Germany needing low interest rates to re-inflate and Italy requiring high rates to control public spending and the European Central Bank paralysed by their inability to square such an economic circle.
The Holy Grail of “free traders” is comparative advantage. This is a first rate example of a neat and emotionally satisfying (to a certain type of mind) intellectual idea which bears little relation to reality. The idea is that every country concentrates on making what it is best at and the overall global product rises because of increased efficiency. Even in theory this is rather dubious because it ignores every other aspect of society than a narrow view of economic relationships and assumes tacitly that a comparative advantage will last. David Landes in his The Wealth and Poverty of Nations (Little, Brown and Co 1998) cites the instance of the Englishman John Borrow, who in 1840 urged the states of the German Zollverin to concentrate on growing wheat, and sell it to buy British manufactures and comments: “This was a sublime example of economic good sense: but Germany would have been the poorer for it. Today’s comparative advantage…may not be tomorrow’s.”
The truth is that any definition of “free trade” is as subjective as that of a “free market”. It has no natural boundaries because the implications of both ultimately embrace the whole of human material endeavour and there are no true natural variables on which to base a definition – even those which might at first glance appear to be objectively and naturally set, such as wages and prices, are determined by matters other than the market, for example tax regimes and welfare provision.