Brexit: the unilateral free trade option

 

As the British and the Europeans renegotiate the European Union following a British referendum a number of options are being considered.  What will not be considered is the option which would in the long term give the best standard of living – unilateral free trade.

For a long time this blogger has believed the best way to do free trade is for a country to do it on its own by removing all barriers to imports.  “Free trade” agreements are not free trade, they are negotiated trade.  To get the full benefits of the law of comparative advantage there must be no barriers to imports. There should be no import duties, no quotas and health and safety restrictions should be genuine rather than to restrict imports.

Unilateral free trade could easily be done by any country as each country has the right to control its imports.  This will leave them open to “dumping” or subsidies by trading partners.  If another country wants to subsidize our standard of living, then we should say, “Thank you very much”.

The case for free trade is based on the law of comparative advantage which says that two countries will be better off if they specialize in their most efficient production and trade even if one of the countries is more efficient in all trading items.  With our background we generally think of better off as meaning more economic growth but it could also mean more leisure time.  The law still applies.

There are two major problems with unilateral free traded – our  commitment to economic growth and the difficulty in making employment changes.

This blogger believes there will be little if any future economic growth because we have used up the easily accessible energy and mineral resources.  There are lots left on the surface of this planet but they are so difficult to extract they are mostly useless.  I also believe many people are aware of this economic uncertainty even if they do not understand what is happening.  This is probably behind the British vote for Brexit, the United States election of Donald Trump,  the increasing popularity of extreme left and right wing politicians and the rise of dictatorships around the world and a lot of other unpleasant developments.

The fear of losing one’s job is highly emotional and this is the second big problem with free trade.  Free trade means changes in production and this means some people will lose their jobs and have to find new employment.  The other side of this problem is that economic changes are a fact of life and will happen regardless of free trade.  We try to deal with changing market conditions with subsidies, import quotas, health and safety restrictions on imports and other trade restrictions. In the long term market forces usually win.

Under current economic conditions a lot of people are likely to lose their employment and a lot of people are going to suffer.  The challenge should be to facilitate the changes and reduce the suffering.  Most people are going to have to accept a lower standard of living.  This blogger believes the best way to adjust is to introduce a basic income plan.  For more discussion of this please see the rest of this weblog and my book Funny Money: Adapting to a Down Economy.

This guy believes the British and the Europeans would benefit if the British were to use the referendum as an opportunity for unilateral free trade.  I also would not want to be a part of the negotiating team as there is unlikely to be a consensus as to what degree of trade to negotiate.  There is so much fear, so many emotions and so many conflicting interests that it will be difficult to come up with something most people will be able to accept.  There is likely to be a lot of turmoil.

 

 

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The benefits and challenges of free trade

Economists are generally in favor of free trade because most of them know the law of comparative advantage but I bet they would quickly change their minds if a “free trade agreement” were to specify that all economic teaching and advice were to be provided by the partner country.

It’s easy to see the benefits of trade but the obstacles can be overwhelming.

The law of comparative advantage tells us that two countries will produce more if they specialize in what they are most efficient and trade even if one of the countries is less efficient than the other in all areas of production.

The first thing to say is that free trade agreements are not what I learned was free trade.  To me free trade should be trade without any restrictions. There should be no tariffs, no quotas and no subsidies.  A country that wants free trade could and should do it unilaterally.  A free trade agreement should be called managed or negotiated trade as negotiations tend to focus on tradeoffs between commodities.  It is my understanding that countries which have conducted unilateral free trade have done very well.

The problem with free trade is that even though the countries as a whole will be better off some people fear they will lose. It becomes an emotional issue because some people are likely to lose their occupations and their income.

The challenge then is to make a win-lose proposition into a win-win so that everyone can share the benefits.  One way to do this would be with a universal income scheme.  The benefits could be in the form of increased income or increased free time for other activities.

Another aspect of trade is that it is a social activity whether we trade with a neighbor or somebody on the other side of the planet.  It is a bit of a stretch to think we have relationships with the Asian people who make our shirts but when some of them died in a workplace fire quite a few of us felt some pain –  for a short time. For relationships to be satisfactory there needs to be a more or less equal exchange.  If we want other countries to buy from us then we need to buy from them.

With the world economy in trouble everyone sees the answer to their problems is  to export more because domestic markets are slowing.  I think there is something wrong in that.  At the same time those who feel threatened by the free trade agreements now in the works will be strongly opposed.  The best bet would be to cooperate and look for win-win trade.

Trading freely or controlled

Free trade is a controversial topic which won’t go away.  The Canadian government is currently negotiating with the European Union and the United States is thinking about it.  Some Canadians are still debating the North American Free Trade Agreement.

ShippingFree trade is attractive because the law of comparative advantage tells us that two countries will be better off and have improved production efficiencies if they specialize and trade.  Also we can  observe that countries which have tried free trade have done very well.

The difficulty is that introducing free trade means some people may have to change their occupations or even spend the rest of their lives unemployed.  This wouldn’t be so serious if we would arrange our economy so that life didn’t depend upon having a job.  It would also be nice if the improved efficiencies were to result in more leisure time.

The term “free trade agreement” is something of an oxymoron.  It is really a negotiated, controlled trade agreement.  There is nothing free about it.

If a country really wants to benefit from free trade it should do it unilaterally.  Just remove all restrictions on imports and don’t worry if other countries don’t reciprocate.  If they don’ want the benefits of free trade, that is up to them.

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