The Case for Unilateral Free Trade
In the 2016 presidential election, Americans have been given a choice between two types of controlled and managed trade. On the one hand, there is Donald Trump who favors outright protectionism and controlled trade for the benefit of select industries and companies. On the other hand, there is Hillary Clinton who favors trade treaties in order to manage trade. Although she seems to oppose the Trans-Pacific Partnership, it is only because she does not believe this treaty to be “fair.” That is, for Clinton, the TPP is not protectionist enough. While Clinton describes her position as “pro trade” the fact is both Clinton and Trump favor two different types of protectionism. Even the disappointing third party candidate Gary Johnson fails to offer a credible alternative by mistakenly believing that the TPP and managed trade will “advance free trade.”
But, there is a third option, and some intellectuals, such as Professor Patrick Minford at Britain’s Institute of Economic Affairs, have recently argued in favor of that other option: unilateral free trade.
Economists claim to have obtained a consensus in favor of free trade. But even if we assume this to be true, the question of how to get to a free-trade regime is left to be debated. Today, most economists put their faith in so-called “free trade” treaties. Inversely, Austrian economists traditionally look at them with suspicion. To this extent, those Austrians follow the laissez-faire doctrine of the nineteenth-century classical economists. For instance, J.R. McCulloch, in his The Literature of Political Economy (1845), remarked that trade treaties “have not been employed to remove the obstacles that oppose commerce” and in 1901, Vilfredo Pareto argued that “From the point of view of the protectionist, treaties of commerce are … what is most important for a country’s economic future.”
If in the past, some trade treaties may indeed have been beneficial for commerce, this is long gone. Negotiations are now left to unaccountable bureaucrats discussing which crony should benefit the most. It follows that “free trade treaties” consist in an avalanche of detailed regulations. The recent trade agreement between the EU and Canada, for example, is 1,598 pages long. But the opposite of protectionism is not thousands of pages long treaties about regulatory harmonization, intellectual property, labor standards, “sustainable development,” anti-trust, etc. There is no place for managed trade when it comes to real free trade.
On the free market, trade is about serving the consumers in the most valuable way, but with treaties, trade becomes an affair of power and politics where cronies, rather than the entrepreneurs, get rewarded.
The economic rationale for trade treaties consists in a simple application of game theory. While every government wants other governments to leave their doors open to foreign competition, they, at the same time, have an interest to erect trade barriers in order to raise taxes. It follows that in absence of international coordination, protectionism would prevail. The fallacy here is that the State is not an individual entity which only maximizes its wealth. In our Western democracies, governments are captured by numerous rent-seekers who all try to live at the expense of others. The fundamental question, then, is to understand what would be the impact of secretly conceived trade treaties on rent-seeking behaviors. By asking this question, it seems improbable that we can achieve a better outcome by giving more power for the State to define what should or should not be subject to free trade. And it indeed happens that treaties are neither the best way to expend free trade nor the most common way to do so. As economist Razeen Sally has noted, according to the World Bank, “two-thirds of developing-country tariff liberalization since the early 1980s has been done unilaterally.”
Instead of a top-down promotion of “free trade” driven by supranational institutions, we should consider unilateral free trade as an important part of a liberal political agenda. Sir Robert Peel, when announcing the repeal of the Corn Laws in the House of Commons in 1846, brilliantly warned: “I trust the government ... will not resume the policy which they and we have found most inconvenient, namely the haggling with foreign countries about reciprocal concessions, instead of taking that independent course which we believe to be conducive to our own interests. ... Let, therefore, our commerce be as free as our institutions. Let us proclaim commerce free, and nation after nation will follow our example.”
Unilateral free trade is a boon for both parties involved in trade regardless of whether or not one of them continues to impose tariffs. For those engaged in unilateral free trade, free trade means they need to export less to import more. In other words, it makes the free traders richer.
The world would have gained much in listening to Sir Robert Peel. Unilateral free trade has the advantage that it needs the State to do only one thing: abstain from interfering. With this alternative, the State cannot grant privileges to interest groups nor can it slow down the liberalization process. Hence, if free trade is the goal, never-ending negotiations should not be the primary means.
We can have free trade now by declaring it unilaterally. For all the true friends of liberty and trade, the motto should be: liberalize first, negotiate later.