Global free trade

By Tim Worstall | 29 March 2005

The question of whether we should have trade seems to be settled, there being few who would argue against it across national borders. What does remain is the question of whether we should have free trade or managed trade, sometimes referred to as fair trade, or in another formulation, trade with protection from unfair practices like dumping.

Patrick Minford appears in London's Daily Telegraph with a piece that details the costs of the European Union's management of trade issues:

Well, you may say, it's not good but how important is it all to us? The answer is: far more important than the Common Agricultural Policy over which we rightly make a huge fuss. The CAP costs us between 0.3pc and 1pc of GDP in excess costs of UK production, payments to inefficient EU farmers, and the burden of high prices on our households.

The "common manufacturing policy" costs us about 3pc of GDP in similar costs; a lot more than raw food because it is so much bigger both as an industry and as an element in our household budgets. This is not chickenfeed: 3pc of GDP is some £30billion, almost half the cost of the NHS.

The full argument can be seen in the webbed version of the proof of his upcoming book here.

Certainly there are benefits to us all of the free trade that takes place within the walls of the EU tariff barriers, but as we can see there are costs to the existence of those barriers. It is the difference between a customs union and free trade. One way of looking at it is that if free trade between Manchester (UK) and Milan is a good idea, why is not free trade between Manchester (New Hampshire) and Milan?

The seductiveness of the customs union idea can also be seen in this proposal for an expansion of NAFTA from the New York Times:

A good starting point would be a shared customs union, with the three countries setting tariff policies in conjunction and protecting each other from improper trade practices by the rest of the world.

Such a customs union would be similar to the effects of the EU. Certainly benefits from the freer trade within the union, but also costs imposed by the denial of complete free trade.

There is no magic answer to this question, of whether we should have global free trade or regional, total or partial. Economic logic tells us that it should be total while political logic, that reality of what can actually be implemented, tells us that we may have to settle for the half-way stage, regional groupings like the EU, NAFTA, Mercosur and the rest. Perhaps better to settle for the most free trade we can get rather than lose it all by asking for too much.