Recent Brexit Trade Drama Shows that Europe Doesn't Really Want Free Trade
As Brexit negotiations approach their initial deadline, U.K.’s plans to renegotiate a quick trade deal with WTO members once it leaves the EU bloc has been met with disdain by some of their trading partners. U.K.’s shortcut deal proposed “essentially copying the same trade deal that the EU and WTO has and then use the same wording in a document covering the U.K.’s new membership”. Russia, U.S., New Zealand, Japan, and Moldova, among others, have raised serious concerns about this since late 2017, and thus did not offer their approval of the fast-track deal last week. They also blocked U.K.’s access to WTO’s Government Procurement Agreement, an accord that would open and smooth out access to government procurement contracts for the signing parties.
Their reasons for opposing U.K.’s proposal have varied: for the U.S., some of the paperwork lacked key forms and regulatory requirements and updates. Russia said that “the draft UK schedule of tariffs and quotas was inconsistent with its obligations under several basic WTO provisions”. In fact, the EU itself does not have a currently ratified list of tariffs at WTO since Croatia joined in 2013, because the WTO process is so slow. Moldova clung on to a grudge: having not been listened to for months by British officials when trying to obtain a diplomatic visa, they have raised concerns whether similar delays are to be expected for Moldovan businesses, leaving them at a disadvantage relative to more preferred trading partners.
However, there is one other underlying reason for these governments’ reluctance to speed up the process and for their desire to bring about new long-drawn negotiations. This can be traced back to what Bhagwati and Irwin called in 1987 “The Return of the Reciprotarians”: the belief that trade liberalization is only beneficial if other countries liberalize to the same extent, or more. Otherwise, the belief goes, countries that remain protectionist will gain at the expense of the countries that have opened their trade borders.
The WTO has done everything in their power to reinforce this fallacy. In the aims and principles of the global trade body, words like ‘reciprocal’, ‘non-discriminating’, ‘stable’, or ‘fair’ qualify trade relations multiple times, while the word ‘free’ is either non-existent or has been replaced by the euphemism ‘more open’. Every rule and negotiation agenda at the WTO also focuses on promoting this stereotype of trade as beneficial only if reciprocal.
And this has worked well from a bureaucratic point of view because the parties involved in these negotiations do not actually want free trade. They want more control over managed trade. The U.K.’s proposed plan is not increasing their control for now—but they gain autonomy to change it and do so in the future. Whatever their official reasons, Russia or the U.S. actually fear is that increased U.K. autonomy will lead to a relatively lower bargaining power for them. Thus, they are pushing for an overhauling renegotiation in which they could trace their spheres of commercial influence while the U.K. is still at a disadvantage. They may also be looking for more concessions and increased access to U.K. public spending contracts, including the development of “high-speed railways, a Heathrow airport expansion or government IT programs”.
My favorite and often used quote from Mises on the shortcomings of a multilateral trade system is an excerpt, quite fittingly, from Omnipotent Government (2010, 250). It rings entirely true today having been written 50 years before WTO’s creation (emphases added):
The meaning of commercial treaties changed radically. Governments became eager to overreach one another in negotiations. A treaty was valued in proportion as it hindered the other nation’s export trade and seemed to encourage one’s own. [...] Under present conditions an international body for foreign-trade planning would be an assembly of the delegates of governments attached to the ideas of hyper-protectionism. It is an illusion to assume that such an authority would be in a position to contribute anything genuine or lasting to the promotion of foreign trade.
The ill-fate of the WTO is very similar to the failure of multilateral plans for peace after the First World War. As Mises (2010, 281) explained, referring to the League of Nations,
As all nations today indulge in nationalism, the governments are necessarily supporters of nationalism. Little for the cause of peace can be expected from the activities of such governments. A change of economic doctrines and ideologies is needed, not special institutions, offices, or conferences.
For trade too, as for peace, nothing can be done unless one abandons protectionism or respectively, nationalism, altogether. In order to do this, no reciprocal concessions are required. Countries can easily do it single-handedly. Unilateral liberalization is not only most beneficial, but also the only way to ensure lasting and genuine free trade, and not just managed trade masquerading as liberalization.
In fact, research shows that WTO multilateral negotiations have actually led to the proliferation of preferential trade agreements among member countries in order to “obtain bargaining leverage within the multilateral regime” (Mansfield and Reinhardt 2003). Other studies have also confirmed Mises’s view on the benefits of unilateralism and the fallacy of reciprocity, showing not only that almost 70% of overall trade liberalization since the 1980s has been unilateral (Sally 2008, 151), but that unilateral reduction of trade barriers may actually beget reciprocal liberalization to a much greater extent than multilateral or bilateral negotiations (Bhagwati 2002). There’s no better gauge for a government’s true commitment to free trade than their willingness to ‘go alone’ (as Bhagwati calls it), to reduce their trade tariffs and customs without expecting reciprocal concessions from other countries. Trading partners may thus be more likely to reciprocate if they see genuine free trade commitment rather than when they know protectionism is preferred.
So if we are to judge the countries involved in this debate by the benchmark of unilateral liberalization, we come to the disappointing conclusion that none of them have any plans for trade liberalization. Quite the opposite. And until they do, they will continue to block each other in negotiations and ensure that what they trade freely are not goods and services, but political favors.
How to do unilateral liberalization? A good guide and an explanation for it can be found in the words of Richard Cobden (1919, 41), whose plea for unilateral free trade was instrumental in convincing U.K. prime minister Robert Peel to repeal the Corn Laws in 1846. The repeal remains perhaps the best example of unilateral liberalization to this day:
We came to the conclusion that the less we attempted to persuade foreigners to adopt our trade principles, the better; for we discovered so much suspicion of the motives of England, that it was lending an argument to the protectionists abroad to incite the popular feeling against free traders, by enabling them to say, “See what these men are wanting to do; they are partisans of England and they are seeking to prostitute our industries at the feet of that perfidious nation…” To take away this pretense, we avowed our total indifference whether other nations became free traders or not; but we should abolish Protection for our own selves, and leave other countries to take whatever course they liked best.