Wealth is created, and people are lifted out of poverty when trade is open, markets are competitive, and property rights are protected. The goal of any nation’s trade policy should be to deliver this for its people at home, to make sure that its exporters do not face barriers abroad along any of these dimensions, and to ensure that supply chains that it manages or has a role in are as efficient as possible. By doing this, trade policy can deliver a win-win situation where the lot of all people in all countries is lifted.
The UK has now acceded to the Comprehensive and Progressive Trans Pacific Partnership which is the most liberalizing large platform agreement based on mutual recognition and equivalence. The CPTPP provisions reach into domestic regulation to make sure that anti-competitive regulation does not thwart the benefits of trade openness. Where countries systems differ, as long as their end goals and regulatory objectives are the same, the CPTPP seeks to ensure they recognize each other’s systems. You are more likely to discover the most procompetitive regulatory setting if countries engage in regulatory competition under the overarching principle of mutual recognition.
How does information spread amongst people to disseminate advances in technology, innovation and ideas generally?
The answer is open trade.
Open Trade and Developing Nations
Contrary to the mercantilist and protectionist outlook, the development of nations, including underdeveloped nations, is not undermined by allowing access to domestic markets by foreign goods and companies. When property rights have been protected and competition has flourished, particular firms develop competitive advantage over others. Weaker, less competitive firms often fall by the wayside. Creative destruction is a healthy and normal state of affairs.
If a nation allows the companies with such advantages access to their domestic markets, the result, where there are no internal barriers or distortions for domestic related companies, is that consumers gain. Additionally, when international competition is allowed to proceed without interference, consumers again gain.
As indicated in our introduction to the Three Pillars, our view of this open trade flows from the work of David Ricardo and his development of the theory of competitive advantage. Open trade has never prevented or excluded less advantaged countries from international trade, but the development of industry or other manufacturing of goods and services has been based upon the more developed nation specializing in their advantaged industry, while the lesser developed country will focus more on those products which the more advanced country has moved away from. Thus, the increase in trade is across the board.
This differentiation of trade has created an international supply chain and division of labor. And within this system, there are crucial advantages for developing nations.
For example, the absence of barriers enables the free flow of information. Advanced technology is disseminated through the open access to and consumption of products based upon those technologies.
The case of Singapore, documented in our special section, indicated how this can work.
Allowing foreign companies to freely establish manufacturing facilities, Singapore made certain that the labor force had a significant percentage of their own workers, and that adequate education and training was available. This has led to improved wage and skill levels, but also the flourishing of domestic businesses. Singapore, under this model, has become one of the leaders in digital technology, and is a global leader in “smart” technology.
This has demonstrated that employing a domestic workers to work in a foreign-owned factory, for example, does not equal “foreign exploitation” or the perpetuation of an underdeveloped, low skill workforce.
Opening Up Trade: The case of the UK (1)
We are using here the case of the UK to illustrate the types of agreements which are generally available to all nations for the purpose of liberalising trade.
During the period of the United Kingdom’s leaving the European Union, fundamental questions about the best means to open up trade to create maximal prosperity have been debated. The answers to these questions are relevant not only to the UK, but to policy considerations by all nations.
In the aftermath of the Brexit vote in 2016, Shanker Singham, a recognized leading international trade expert, played a significant leading role in formulating the direction for the UK government both for the transition away from the EU, and for realizing the full potential for the UK in the post- EUR era. The following is a summary of his suggested approach.
There are four types of action that can be taken to open up trade:
- What we can do unilaterally to create a more pro-competitive environment at home and a reduction of tariffs.
- What we can do bilaterally to sign agreements with other countries
- What we can do plurilaterally to gather a group of like-minded countries into a broader Prosperity Zone. (2)
- What we can do multilaterally including our WTO rectification process, and our liberalizing agenda going forwards.
Here is a summary of the UK trade approach:
- Unilateral Action
- The UK should lower its tariffs for industrial goods where they are low (below 4%) already. It should also lower tariffs and quotas for agricultural products that it does not produce, and for products where there are directly competitive or substitutable products.
- The UK should also undertake domestic regulatory reform, putting competition firmly at the centre of UK regulatory policy. For example, Australia and New Zealand have incorporated competition agencies into their regulatory promulgation processes through their Productivity Commissions. This would mean better regulation that is more narrowly tailored to the regulatory objectives without damaging trade or the market unnecessarily.
- Bilateral Action
- The UK needs agreements with numerous nations.
- Agreement with the EU. Both the UK and the EU have now stated that they seek a comprehensive free trade agreement (“FTA”) and have publicly talked about the need for a set of interim agreements between the UK’s exit and the negotiation of a full FTA.
- UK-US FTA. The UK and the US can develop significant additional gains form mutually liberalized trade, including in the areas of defence trade, financial services and insurance services, access to government procurement markets, and agricultural markets.
- Bilateral agreements with India and other emerging markets. The UK can begin talks with emerging markets although agreements may be difficult to negotiate. There is potential for an agreement with India, with the UK being more open on its domestic settings, particularly with respect to agriculture and business visas, in return for India opening legal services and some financial, medical and educational services.
- Economic Partnership Agreements with developing countries. The UK should enter into real economic partnership agreements with developing countries, particularly the African, Caribbean and Pacific (“ACP”) countries. These should incorporate UK openness on agricultural and other products, such as tropical fruit, sugar, etc., the UK porting over the “Everything But Arms” initiative to support free trade with the least developed economies, structural reform in ACP countries, and reduction of tariffs on imports of advanced manufacturing goods to ACP countries.
- Negotiations with countries where the UK has agreements through the EU. The EU has agreements with a number of countries with whom the UK will have to agree an exchange of notes such that both parties will agree to be bound by the terms of the current agreement (with UK regulatory bodies replacing the European bodies, and other technical modifications in terms of schedules) until any new agreements are developed. The UK should also seek to agree higher standards agreements with certain countries, particularly Switzerland, Norway, Iceland, Turkey, Canada, Chile, Mexico, South Korea and Singapore.
- The UK needs agreements with numerous nations.
The UK has now acceded to the Comprehensive and Progressive Trans Pacific Partnership which is the most liberalizing large platform agreement based on mutual recognition and equivalence. The CPTPP provisions reach into domestic regulation to make sure that anti-competitive regulation does not thwart the benefits of trade openness. Where countries systems differ, as long as their end goals and regulatory objectives are the same, the CPTPP seeks to ensure they recognize each other’s systems. You are more likely to discover the most procompetitive regulatory setting if countries engage in regulatory competition under the overarching principle of mutual recognition.
The UK should now be a force for liberalisation at the domestic, international and multilateral level. A major G7 nation adopting this type of approach to open trade will have a significant impact on how other countries view international trade.
Moving to a Different Mindset
An open trading system maximises the benefits to all consumers and producers participating in those markets, and therefore may be considered “the best of all possible worlds” (3) . Therefore, nation-imposed barriers to that trade should be considered distortions. As Singham has stressed; “The purpose of trade liberlisation is not to ensure that the producers of one’s own market have a better access to external markets. The purpose of liberlisation is not to create more jobs in one particular marker. These last two objectives are merely side-effects of significant trade liberalization.” (p6 TCDRP)
Even in terms of the typical approach to trade negotiations, concessions from removing trade barriers are seen as the source of benefit to producers and consumers. From our standpoint, the system is distorted by those barriers, and therefore removing or lessening distortions is a step towards what should be the normal state of open trade.
This shift in thinking, away from the narrower national self-interest to that of global welfare, is crucial to protect the consumer welfare, and the producer welfare, as well. “These benefits can be expressed clearly and can be communicated to individuals and thus can buttress the arguments of consumer groups who should be the prime beneficiaries of trade liberalisation.” (pgs. 6-7 TCDPR)
In Summary
In the aftermath of World War II, the nations of the world gathered at Bretton Woods, the United Nations and elsewhere to create new institutions which would establish economic and financial security. These institutions included the World Bank, the International Monetary Fund, and, later, the WTO and GATT. War-time government-run industrial mobilisations and protectionism were replaced by liberlised markets and globalization, creating an unprecedented surge of post-war prosperity.
In regard to GATT, however, there was a flaw. Here is some of the background.
The possibility of the International Trade Organization was created out of a series of conferences, resulting in the creation of its Charter in Havana between 1947-48. The Charter was never approved, and the ITO was stillborn.
That Charter addressed issues never subsequently addressed by GATT, linking directly internal market conditions and barriers, with international trade. For example, the objective of Article 1 of the Havana Charter was “to facilitate through the promotion of mutual understanding, consultation and cooperation the solution of problems related to international trade in the fields of employment, economic development, commercial policy, business practices and commodity policy.” (p 24 TCDRP) Thusly, the ITO intended to intervene into domestic conditions that might thwart the goal of liberalising trade. It was precisely because of the proposed reach of the ITO into domestic issues, that the US Congress opposed the creation of the ITO, and its fate was sealed.
After the failure of the ITO, none of the subsequent trade organizations addressed this relationship between international trade, prosperity, and domestic barriers. GATT and WTO helped to reduce trade restrictions but have not significantly addressed the distortions created by national governments establishing advantaged domestic companies which hinder competition, and impact not only internal market conditions, but also international trade.
The Competere Foundation as part of its mission, proposes an approach to rectify the inadequacy, and is developing tools which can aid governments, corporations and, most importantly, consumers in the mission to realize the full potential of globalization.
Those tools start with the Three Pillars.
What About Fair Trade?
With the general downgrading in recent years of globalization and free markets by major governments, the policy of free trade has been often replaced with a discussion of fair trade.
In this video, excerpted from a longer discussion, Shanker Singham discusses his perspective on fair trade with Christine McDaniel of the Mercatus Center at George Mason University.
Footnotes
- This section draws from Shanker Singham, A Blueprint for UK Trade Policy, Legatum Institute Special Trade Commission (2017)
- op.cit. pgs. 4,5
- A concept developed by the German philosopher Gottfried Leibniz. See “Theodicy: essays on the goodness of God, the freedom of man, and the origin of evil.” Gottfried Wilhelm Leibniz – 1985 – La Salle, Ill.: Open Court. Edited by Austin Farrer.
Documentation
