Hot on the heels of the latest annual Bilderberg get-together (link no longer available) in Berkshire, England, political leaders at the just-concluded G8 summit in Lough Erne, Northern Ireland, announced that the EU and US intend to broker a free-trade agreement between them by the end of next year, with talks towards one due to begin next month.
How should supporters of free-markets respond to the news of such an agreement – with jubilation, indifference, or dismay? Prima facie, such a deal can only be good news. The removal or lowering of tariffs fosters trade and thereby supposedly facilitates mutually beneficial international division of labour which in turn, by fostering a greater interdependency between nations, reduces the chances of war between them.
In reality, however, the prospect of such an agreement is anything but a cause for celebration for freedom lovers. The problem is that so called international ‘free-trade’ deals are invariably anything but truly such. They formalize highly managed trade in ways that are often deeply detrimental to the interests of ordinary citizens of the countries which are parties to them.
Why is that so?
Well, along with the reduction and elimination of tariffs on goods imported between participating states, such agreements involve mutual acceptance of common regulations and standards in the name of the harmonization of trade and creation of a level playing-field. In reality, such regulations invariably stifle genuine competition between producers and potential producers, favoring larger, already established corporations over new entrants, since compliance costs invariably favor bigger units and not smaller new entrants. As was observed about the impending deal by the libertarian-minded Conservative MP Douglas Carswell:
Simply allowing willing buyers and sellers to trade freely with one another is not quite what the architects of this trade deal have in mind… [W]hat is envisaged might be better described as a mercantilist arrangement, drawn up by officialdom on both sides of the Atlantic. Far from free trade with mutual standard recognition, the small print is all about common standards, which define under what conditions transatlantic trade is permitted…. If that was not complicated enough, all kinds of vested interests are already lobbying to make sure the rules get written a certain way – preferably one that favors them, but shuts out their rivals.
Then, there is the small matter of covert protectionism by parties to such agreements which persistently accord preference to native producers over foreign competitors, notwithstanding their formal agreement to regulations designed to prevent such chauvinism. Such gamesmanship tends to favor more corporatist states, like France and Germany, over more free-market oriented states, like the US and the UK.
A graphic illustration of this phenomenon, and one to which the US should pay special heed in relation to the proposed trans-Atlantic agreement, is that provided by Germany in the case of public authority procurements, among the domains on which agreement between the EU and US is being sought. Within the EU, all public procurements for a large range of goods and services, when they cross certain specified monetary thresholds, must in theory abide by certain EU wide directives that prohibit procurements favoring native tendering corporations over foreign ones. In 2011, the European Commission conducted and published the results of a review (link no longer available) of how rigorously these rules were being complied with by member states. It found that:
There is a widespread perception of discrimination against foreigners that is shared by the majority of firms, which frequently participate in public procurements. 46 per cent of such businesses think that local preferences influence the outcome of public procurements to a high extent, 27 per cent think that such preferences influence the outcome to a medium extent and only 14.5 per cent think that there is no discrimination against non-domestic bidders… [Additionally,] there are many administrative barriers to market access that in practice act as discrimination against foreign bidders, such as requirements to submit additional certificates which can be required from non-national bidders. These are perceived as an obstacle. [pp.143-144.]
A month after the appearance of that EC report, the Financial Times published details of recent contracts for rolling-stock that had been tendered in the EU, along with the names of the countries whose firms had won them. In the case of Germany, a €6 billion contract for 300 intercity trains had been awarded to Siemens of Germany. In the case of France, a € 8 billion contract had been awarded to Bombardier of France. In the case of the UK, a € 600 million contract for high-speed trains had been awarded to Siemens of Germany, and a £4.5 billion contract for trains had been awarded to Hitachi, with the manufacturing to take place in Japan and the UK.
According to the European Commission (link no longer available):
In 2009 over 150, 000 invitations to tender were published (by 35 000 authorities) in conformity with EU directives. The estimated value for these contracts was €420 billion. This represents approximately 20% of total public expenditure on goods, works and services.
The EC found that, between 2007 and 2009, fewer than 2 per cent of such kinds of procurement contracts had been awarded to companies domiciled in another member state, amounting to only 3.5 per cent of the value of all public contracts awarded. From the results of their survey, the EC drew the conclusion that: ‘Geography, history and a common or similar language seem to have an influence on the extent of direct cross-border procurement.’
In the case of Germany, by far the EU’s largest manufacturer, this problem goes well beyond the public sector. The roots of such economic chauvinism in its case can, it seems, be traced to the very different so-called Rhine model of capitalism that lies at the heart of its economy, where it is banks rather than stock-markets which are the prime sources of investment capital for firms. By contrast, in the so-called Anglo-Saxon model, common to the US and the UK, it is stock market equity that is the prime source of corporate investment funds. Germany’s is a system that lends itself to evasion of international rules designed to bring fair competition between parties to an international trade agreement.
Whatever one might think of his general animadversions against international free-trade, in contrast to judicious recourse to governmental protection of domestic industries, some interesting remarks on this subject were offered earlier this year by Ian Fletcher, senior economist of the Coalition for a Prosperous America. At a talk he gave on Free Trade in January to the Commonwealth Club of California broadcast on C-Span when asked by a member of the audience how north European countries managed their trade in ways in which the United States did not, Fletcher responded:
The key thing to understand is that, if you look at the intellectual and policy history of this issue — and I use the term ‘greater Germany’ which briefly means Germany and a host of countries which follow the example of German economic policy, Austria, Demark, Holland, and Scandinavia… Here’s an example, in Germany one of the things they have which we don’t is that their corporate structure is much more dependent on debt as opposed to equity, that is, bank finance as opposed to stock-market finance. What this means is you have giant, so-called ‘universal’ banks there, that own a large proportion of their major corporations, so that if you have BMW, for example, deciding: “We’re not going to buy our carburettors from this German manufacturer that’s been supplying us for 30 years. We’re going to buy them from this company in Texas, or England, or South Korea or wherever, they are going to get a call from their bankers saying: “Look, you idiot! If you cut these guys off, they’re going to go broke, or won’t be able to pay the money they owe us. So, if you ever want to get trade credit at a decent rate again from us, you are not going to do that.”
Now, obviously, when you have system set up that way, nobody has to make that ‘phone-call. It’s just understood that there are people you’re not supposed to do business with. It’s still a capitalist country. It’s not a command economy. There are limits as to how incompetent people can get and still expect to be in the club, which is why there is a lot of internal pressure. Everybody’s got to be good so we can all do business inside the club and still remain profitable, and so forth.
But that’s just one of the more polite examples of what’s sometimes called “crony capitalism” which is a terrible term but I use it because people understand it. Sometimes, [in] countries like Malaysia and Indonesia, it’s just a bunch of rich, greedy, incompetent people, scratching each others’ backs. In the more civilized countries — the masters are Germany and Japan, and the countries that follow after them, like Korea and Taiwan – all these countries have their different arrangements. But the pattern is that you do have a clubby corporate establishment and the government understands the game. The government wants to favor domestic producers. The government understands they’ve got to be competent, so they push people hard, but there’s an assumption of insiders and outsiders. And that assumption is so imbued in the system that nobody really has to talk about it very much. But if you do talk to people at the right time and place, nobody denies this, because they say: “Look, it works very well. For us, it’s good for the country. What have we got to be ashamed of?”
So there you have it. Different forms of corporate capitalism in different countries are liable to follow common rules very differently, and the form common to the US and UK is liable to be injurious to both when each is signed up to a free-trade agreement with countries with a different form of capitalism to theirs, as the UK currently is.
Rather than lecture the UK as to what it is liable to miss out on if it leaves the EU when it’s on the verge of securing this new free-trade deal with it should it remain a member, what the US should be doing is to examine in earnest whether it wants to get into bed with a partner liable to screw it something rotten, economically speaking, at the first opportunity. As for the UK, it should be appraising the benefits of continued membership of a supra-national organization so many of whose other members seem to play according to a different set of rules than it does and different to which they are all officially signed up.