President Obama weighed into the Brexit debate on his recent visit to the UK, saying that if Britain left the EU, she would be at the back of the queue when it comes to a free trade agreement.
If this was intended to scare voters into voting Remain, the tactic seems to have failed, with the subsequent swing in the polls favouring Brexit. However, this intervention has drawn widespread attention to the current trade negotiations between the US and the EU, known as T-TIP.
It stands for Transatlantic Trade and Investment Partnership, and is intended to be a free trade and investment agreement between the United States and the (currently) 28 member states of the EU. It makes eminent sense to have free trade between these two economic powers, which account for over 50% of world GDP. Both sides recognise the economic benefits, hardly surprising for America which experienced the disaster of the 1930 Smoot Hawley Tariff Act. It is a little surprising that the EU’s leaders, who genuinely dislike Anglo-Saxon concepts of free markets, and therefore the concepts behind free trade, also accept it will improve prospects for the EU economy.
Let us pass on the subject of the EU leadership’s grasp of basic economics. The EU already trades relatively freely with the US, with tariffs where they are applied, reckoned to average about 3%, a rate that has fallen over time. More difficult will be harmonising regulations, a subject which is very contentious. Left-wing and environmental groups in Europe are already warning us about public sector services being opened up to privatisation favouring American service providers, lower standards on food and environmental safety, loss of EU jobs to lower-cost American labour, and the possibility that European governments will be sued by litigious American corporations. The list of objections seems endless.
The framework for TTIP is so contentious that negotiations are held in secret, which is why it had had so little publicity, until President Obama’s Brexit intervention. But many vested interests will have to be compromised, so it is hard to see it getting past the US Congress, and if it requires the unanimous support of all 28 EU member states, it will be a dead duck. Then there’s the fifty-fifty chance that Donald Trump will be elected President before anything is signed, which could set back negotiations even further.
Therefore, frightening would-be Brexit supporters over missing out on T-TIP, which might never be concluded, is a thin argument. In fact, the concept of multilateral trade agreements between multiple parties has long proved impractical. Doubtless, this is why the EU hardly has any free trade agreements worth mentioning. With the other G-20 nations, she has only two, with South Korea and Mexico.
Why free trade works
The free-market, sound-money approach is to let private individuals manage their own affairs, and if they want to buy goods and services from abroad, they must be free to do so. Ordinary people make the money to buy goods by earning it. To make the money, they produce goods and services that others, including foreigners, wish to buy. It matters not whether spending is from current income or from savings. So long as money is sound, total savings for a given population remain relatively stable anyway.
It is therefore not possible for the private sector on its own to create persistent imbalances in trade. Trade imbalances must therefore originate from government, the consequence of unsound monetary and fiscal policies.
A government licences the banking system, which creates both money and credit. By expanding the sum of these two monetary components, trade imbalances will quickly arise, because the extra credit allows an immediate increase in consumption to develop without a matching increase in domestic production.
An expansionary fiscal policy, not funded by an increase in savings, also results in trade deficits for the same reason, which is why a trade deficit is more often than not accompanied by a budget deficit. The exception is in countries where there is an overriding tendency to increase savings instead of spending, such as in Germany and Japan in the past, and in China today. In these cases, an initial increase in imports fuels production, not consumption, and is subsequently followed by an offsetting increase in exports.
Therefore, trade imbalances are solely an unintended consequence of government intervention, and cannot be blamed on ordinary folk and the businesses they run. This simple theoretical deduction appears to be missed by government economists, who have turned their backs on free markets. These are the so-called experts advising politicians. Furthermore, politicians are also under pressure from lobbying interests, intent on restricting foreign competition. No wonder they turn to restricting cross-border trade as a remedy for the evil of the day.
Nowhere is this more contentious than in allegations of dumping products in foreign markets by selling them below the cost of production. The first mistake here is to regard cost as the factor that sets prices. This is incorrect: prices are subjectively set by buyers. To regard cost of production, or more specifically the cost of labour, as setting market prices, is one of the principal errors behind Marxian philosophy. This mistake has been passed down into modern macroeconomics, and seized upon by uncompetitive manufacturers.
The second mistake is to describe dumping of basic industrial products as unfair competition. As is always the case, what is unfair to one person is fair to another. If we accept this reality, we can then look at dumping of steel, for example, for what it is, which is the benefit it gives consumers of steel, from either the temporary distress caused by global overcapacity, or from a deliberate policy of a government subsidising steel production. Consumers of steel, such as engineering industries, will welcome lower input prices for this basic raw material. If this was better understood, it would be recognised that anti-dumping tariffs are counterproductive. And it was an important reason the Smoot Hawley Tariff Act, which sought to penalise imports, backfired. It prevented the acquisition of raw materials for American industry, hampering their production, which intensified the 1930s slump.
Another way of looking at trade restrictions is they are designed to disfavour emerging economies, who always have lower labour costs. The wealthy nations, through the Bretton Woods apparatus of the World Bank and the IMF, together with the newer World Trade Organisation, have between them dictated terms of trade essentially to protect their own economies. An illustration of this cabal’s dominance was the fight China had to get her currency included in the SDR, despite being the world’s largest economy in terms of international trade. The bureaucracy is also stifling: Algeria’s application for membership of the WTO, tabled in 1987, is still in negotiations.
Consequently, China, Russia and the rest of Asia, plus their key commodity suppliers, are forging their own way and by-passing the old order. Russia still has trade sanctions imposed for political reasons, and China is turning away from the west, having recognised it is easier to create her own Asia-wide market. The successful progress made by the Shanghai Cooperation Organisation towards bonding the whole of Asia into an economic powerhouse, containing more half the world’s population, has caught the established economic order unawares.
If the British people people vote for Brexit, there is little doubt that trade relations with the EU, even before the two-year grace period is up, will become very contentious, and there will have to be a complete rethink by government in trade policy. Realistically, there would be little alternative to embarking on a policy of freer trade, encouraging British business to raise its sights beyond Europe, particularly towards Asia. This is, in fact already the chosen path, with George Osborn a repeat trade visitor to China. The City of London has already been selected by China to provide its international financial services, and Britain was the first western nation to join the Asia Infrastructure Investment Bank.
There would be an initial opportunity to bridge the gap between emerging and advanced economies by offering free trade agreements to the Commonwealth, which includes the emerging Indian power-house. This could be followed by free trade agreements with China, and any other nation that wishes it. Consumer protection need not be compromised, because imports would be required to satisfy British consumer and safety standards.
The trade unions would almost certainly hate it, seeing free trade as a threat to jobs. However, industry as a whole would rapidly switch its focus to benefit from the opportunities created, and it would forget it ever thought of remaining in the EU, just as it has forgotten its near-unanimous, misguided support for Britain to join the euro in the 1990s. The City of London would love it, with supporters for Remain clamouring for the new opportunities.
In the event of Brexit, Britain’s politicians could be forced to move towards free trade with everyone, just as Robert Peel did when his government abolished the corn laws in the 1840s. If the British government took that free-market view, the economic benefits that would follow could rival those following Peel’s reform, not just for Britain, but for all other nations prepared to join in. Perhaps an independent Britain opting for free trade will even encourage other EU members to rethink their trade policies. After all, they seem to recognise there are some economic benefits, otherwise they would not be negotiating T-TIP.
For the moment this is only wishful thinking. The British Conservative-led government is emotionally inclined to free markets, but even its leaders do not appear to be fully persuaded of an unhampered free-for-all in trade. And as for T-TIP, it is an ugly acronym for an unworkable arrangement, and it should be consigned to the trash-tip of history’s failed projects.