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Is the European Union Really the Friend of Free Trade?
James Forder

This pamphlet argues that the dynamics of the process of European integration are likely to lead to a more protectionist stance by the European Union in the world trading system. One reason is that achieving agreement on steps of integration has routinely led to policy commitments which bind certain policies to certain objectives, making it hard to see them being used for other objectives should that be desirable. For example, the Central Bank is required to concern itself with inflation, not unemployment. On the other hand, the Social Chapter is intended ultimately to guarantee extensive rights to many workers. Similarly, the use of fiscal policy is restricted by the Stability Pact.

Furthermore, the European policymaking process is likely to be susceptible to pressures for protectionism because in advancing integration within Europe, arguments with a protectionist core have repeatedly been used. A routine example of this is that it is frequently said that monetary union was 'necessary' in order to prevent countries engaging in competitive devaluations to improve their trade position. But if that is true of European neighbours, it must be presumed true of the rest of the world as well.

A protectionist policy will also have great appeal to the European Commission because it will allow it to put itself in the position of acting in the collective interest of 'Europe', rather than arbitrating disputes between the members of the European Union. It will also be able to deploy various arguments in economic theory to the effect that protectionism can, in certain circumstances be beneficial in order to give intellectual legitimacy to the policy. If, as seems inevitable in the light of its exclusive commitment to price stability, the policy of the ECB causes unemployment in at least some parts of the Union, resentment will grow, and the European institutions will have to find a political response. With no other policies available, and trade intervention having such appeal to the Commission, protectionism is much the most likely outcome.

James Forder is Fellow and Tutor in Economics at Balliol College, Oxford. He is author of Both Sides of the Coin, a debate on British membership of the Euro written with Christopher Huhne.

Below are extracts from Is European Integration really the Friend of Free Trade?:

Preface, P.1

‘Do European integration and monetary union favour free trade? This pamphlet will argue that, although one of the original aims of European integration was to promote free trade - and integration appears to remove barriers to trade - the policy process as a whole is likely to move in a protectionist direction. The reason is not that protectionism is widely thought to be a preferable policy, but that the arguments for it, when combined with the political and institutional circumstances prevailing in the European Union, are likely to make it seem attractive. The European Union's record on international trade, even to date, is far from perfect and the forces exist for a substantial move in a protectionist direction. Especially after the introduction of the single currency, the pressure on European policy makers to depart further and further from a free trade stance will be difficult to resist.

‘In the rest of the world, the same economic arguments apply and, in many quarters, there is also concern about the tendency of 'fortress Europe' to favour European Union producers over others. Consequently, a drift towards protectionism in Europe can hardly avoid pushing the rest of the world towards retaliation. There will then be a danger of a major trade war, and possibly the collapse of the world trading system. Such an outcome would certainly spell disaster for the world economy, and it is deeply to be regretted that the European Union, in its rush towards integration, and with the ill-conceived plan for monetary union in particular, has put itself in such an uncomfortable position.’

Chapter IV Conclusion, p.22

‘Few who have considered the issue dispassionately have abandoned Ricardo’s conclusion that free trade is best. But this does not mean they have failed to see the limitations of his argument, and it cannot be said that there are clear-cut arguments that one country’s interests are invariably served by free trade whatever the policy of the rest of the world. That matter, treated dispassionately, comes down to judgements: judgements of particular cases, judgements of particular circumstances and judgements of the risks of foreign reactions.’

Chapter IV Conclusion, p.22

‘Nor do the interests of the European Commission point towards their adopting a clear free trade policy. They have a desire to promote ‘national champions’ and owe a debt for 1992. Indeed, it is to the European Commission that businesses are likely to turn to seek the protection which, naturally, they seek in pursuit of their own interests, since national governments have given up many of the relevant powers. And the Commission is unlikely to resent approaches from business, since in the theory of integration such ‘transfers of loyalty’ are one of the measures of its success.’

Chapter IV Conclusion, p.25

‘Whilst pushing forward the project of European integration remains the great priority, it will be much easier for the European Commission to present itself as the servant and the defender of the European people if it acts to protect jobs and if it acts to promote European business, than if it sits back, resting on doctrines of Ricardo and appealing to the general, long run benefits of free trade as unemployment takes its toll on the people, on the economy, and on the idea of Europe.’

 

Available from Politeia

Is the European Union Really the Friend of Free Trade?

Publication Date: June, 1999

Cost: £7.00

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