Wednesday, May 03, 2017

Unilateral free trade is the way to go for both EU countries and Britain

Published by The Conservative

How to make the EU popular again?

In the course of the last year, the UK has been “threatening”, according to some, to go for the so-called “Singapore-option in case the EU would be inflexible during the negotiations on the UK’s exit from the EU and on its trade status after the exit. In particular, UK Chancellor Philip Hammond has suggested that the country may cut taxes in retaliation for the EU complicating Brexit.

First of all, it should be questioned what would be so bad for the EU in case Britain would do this. A stronger UK economy – which would bethe result of the UK government relaxing the tax burden on those who are creating wealth – would logically also benefit the economies ofmainland Europe, as these trade extensively with the UK. The proverbial “German car manufacturer” would be able to sell even more cars tothe British than before. It would also put pressure on EU governments to lower their own corporate tax rates.

Secondly, the UK has already been lowering its corporate tax rate before the Brexit vote, as a result of international competition. This happens amid similar corporate tax cuts or plans to do so as a result of global competition by the likes of Finland, the United States, Belgium, theNetherlands, France, Japan and Italy. Even German Finance Minister Schauble has promised to cut corporate taxation, oddly enough not longafter w  arning the UK not to do so in the context of Brexit.

In short, the UK may or may not have lowered its corporate tax rate after Brexit. What’s however much more related to Brexit and where it may indeed lead the UK to the “Singapore route”, is trade policy. Britain will be able to decide its own tariffs and it will be able to conclude trade deals on its own, as this power will be transferred from the EU level after the UK will have left the customs union, which may happen only some time after the UK’s EU exit, likely in April 2019, given how Britain needs to adapt its own customs bureaucracy first.

One of the main characterics of Singapore is its policy of unilateral free trade, to a great extent at least, something it has in common withHong Kong and South Korea. Whereas there are many things that could be improved in Singapore, starting with its lack of free speech even when it comes to the city state’s economic policy, its trade openness is clearly the core factor having contributed to its enormous economic growth during the last 50 years.

So why are so many people against unilateral free trade?

Many people feel it is somehow unfair to allow market access to businesses when they are coming from countries that do not offer the same kind of market access in reciprocity. China, for example, obviously does not practice free trade. Instead, it has a corrupt protectionist state-driven economic model. That model is however already a massive step forward as compared to what China was before it opened up to theworld in 1978. If the West had kept its door shut until China somehow magically would have converted to Western liberalism, no 700 millionChinese would have been lifted out of poverty and no cheap products would have been enjoyed by Western consumers, helping them to cope with the ever expanding tax and regulatory burdens.
Then – Europe’s and America’s protectionist populists may remark – Western openness to China surely has eroded the West’s manufacturing base, hurting the middle classes badly? That’s an incorrect assessment. The problem is not so much that businesses have chosen to move to countries where people are still willing to do the hard work needed to produce some basic materials and that this has destroyed jobs in theWest. The real problem is that due to the burdensome tax and regulatory policy choices of the West – also in the U.S., where the corporate tax rate has risen to 35% - not enough new jobs have been created. While China has been experimenting with elements of capitalism, the Westhas been lured into adopting elements of socialism, despite the evidence of the massive failure of this model of development in Russia and many other countries.

When one would take it to its logical conclusion, then the more reciprocity is inserted into trade policy, the closer we would move to theworld’s common lowest denominator and to the level of openness of Zimbabwe and North Korea.  

Surely, some middle way should be found, some may say. In order for companies to grow into world players, they may need some state protection first, the thinking goes, and when they have grown up it’s fine to stop protecting them. Here’s how to deal with this argument: while it’s true that some companies do benefit from protectionism,  one should look at the total cost to the economy.

First of all, protectionism makes sure that consumers are faced with either less choice or higher prices of products and services. Secondly, companies that do import bear the brunt– and these days it’s getting harder and harder to distinguish between “importers” and “exporters”, given the ever more complex cross-border supply chains in many industries. Protectionism really distorts market processes, effectively reducing economic prosperity. To deal with the restrictions, companies need to find second rate service providers or pay more for certain goods than they would have otherwise. In orthodox economics, one needs to look at the interest of the consumer, as the French (!) 19thcentury economist Frederic Bastiat has so eloquently pointed out. Why? Everyone is a consumer, plain and simple.

Perhaps then unilateral free trade would mainly be good for the strong in society, some may object. Also this has been refuted by evidence. Open Europe’s very first research paper back in 2005 concluded that EU protectionism mainly hurts society’s poorest members, given how they spend the highest percentage of their income on food and clothing, as compared to wealthier income groups. Food and clothing are precisely the kind of items made more expensive as a result of the EU’s protectionism.  
Then isn’t this a geostrategical matter? Shouldn’t the European Union – or Britain after Brexit – shield off its agricultural markets and shower it with subsidies just because food is such an important thing? We wouldn’t want to have our food supply being shut off by Russia, would be? Also here the facts reveal the obvious: When New Zealand opened up its agricultural sector at the beginning of the 1990s, food production tripled. In contrast, while their counterparts in New Zealand are thriving, Europe’s dairy sector has become ever less competitive. That’s no surprise, given how they are forced to operate in the context of the EU’s plan economic model for agriculture. Protectionism precisely is what undermines the vibrancy of our agricultural sector.

Opening up trade unilaterally isn’t only about slashing tariffs on imports to zero these days. It’s about allowing goods to be imported easily, making the process of inspecting them at the border as smooth as possible. It’s about allowing services and goods providers from other countries to offer their services in a convenient way, getting rid of the unnecessary bureaucracy to buy a car in another country or to buy insurance from abroad. It’s about a predictable, open and smooth process for immigration. While the differences in levels of wealth in today’s world may still be too big to allow completely unrestricted migration, there is no reason why people who apply for a work visa shouldn’t get a quick answer or why the process shouldn’t be fluid for businesses. 

Brexit offers an opportunity to go for unilateral free trade, also to the EU:

With Open Europe, we’ve pointed out that the UK has massive opportunities to boost its trade after Brexit, suggesting it should prioritise China, India, Pakistan, Bangladesh, Israel and Nigeria. These opportunies are just as great for the EU27, however. The EU should stop trying to overload the trade agreements it’s trying to negotiate with all kinds of technical standards and understand that countries won’t be lining up to trade with the EU if it insists that they need to take over EU regulation first. Also, the UK or the EU should try to convince protectionist countries like China, who will not accept a complete opening of their markets, to at least open certain sectors of its economy or adapt its regulations for a specific sector so to allow foreign companies to provide their services to the Chinese. If EU-US trade talks for the “TTIP”- deal would be revived, why link opening of agricultural markets – a thorny issue everywhere in the world really – to the opening of other markets, which countries typically are more keen to open?  

Also with regards to opening up internal trade, there is much the EU27 can still do. It should learn from Brexit and realize that a member ofthe club is leaving because the club hasn’t been focusing on its core job: to scrap barriers to trade between countries. To buy a car in another EU member state or to be able to enjoy the services from a foreign airline or foreign telecom operator is not something that often provokes protest. Every time the EU is facing opposition, it’s because it is organizing fiscal transfers, because it’s imposing conditions linked to these fiscal transfers or because it’s sticking its nose into possibly most sensitive topic in every country in the world: immigration. If only the EU would become what it was sold as to the British in the 1970s – a mere free trade arrangement – it could be popular again. The EU’s insurance market hasn’t been opened up. Its attempt to boost the free flow of services got stuck more than 10 years ago. Why not have only a limited number of EU countries having their services markets opened up for each other, avoiding the approval by the likes of Germany, who really get nervous when hearing the idea of tolerating someone qualified for something with a non-German degree? And if the EU would keep on failing to close large scale trade deals, why not allow single member states to try their luck? Iceland, Norway and Liechtenstein are part of theEU’s single market but can close their own trade deals already anyhow.

In conclusion: A new push is needed to reinvigorate Europe’s sclerotic welfare states and more trade openness really is the way to get this going. As multilateral trade deals and grand bilateral trade agreements have proved to be truly hard to close, unilateral free trade hasn’t beenproperly tried in Europe. With Brexit, the UK has the chance to do so and EU countries can be inspired by the success of this.

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