Daily Archives: December 17, 2010

What do we mean by “Free trade”?

“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.

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