TCS Daily


Reluctant Free-Trader

By Brian M. Carney - May 8, 2003 12:00 AM

According to the European Union's own mythology, the bloc stands as a testament to the power of trade to bring people together, end wars, and spread prosperity. But for all that, the EU remains remarkably reluctant to share these benefits with most of the rest of the world. It has made the occasional flamboyant gesture, as with Trade Commissioner Pascal Lamy's "Everything But Arms" initiative two years ago.

But on the whole, Fortress Europe has remained just that, even while extolling the benefits of free trade within its own borders. Currently, the EU's inflexibility about its own agricultural subsidies, which would be rendered unsustainable by any lowering of the EU's external tariffs on ag products, threatens to derail the so-called Doha round of global trade-liberalization talks.

Even Lamy's Everything But Arms agreement, which the EU likes to trumpet as proof of its commitment to free trade, is less than it seems. It targets the 48 "least-developed" (read: poorest) countries in the world, which is a nice humanitarian gesture, but has the added advantage of ensuring that the total volume of trade potentially affected is, from the point of view of the $8 trillion EU economy, minuscule. And yet Lamy still had to agree to a nine-year phase-in for certain politically sensitive crops, prompting some wags to dub it the "Everything But Farms" Agreement.

But the full explanation for the EU's reluctant free-trader status goes beyond its subsidies to Swedish sugar-beet farmers. To call the EU's single market project "liberalization" isn't quite accurate, for the single market isn't exactly a free market; it's a regulatory one.

The principle behind the single market, as embodied in the so-called four freedoms - free movement of people, capital, goods and services - is a worthy one. But its implementation is bogged down in thousands of detailed rules, regulations and "directives," many of which have to be transposed into national law in each member state, leading to more regulation and more rules. Some of these rules are good and necessary, but most of those fall into what, in the parlance of Brussels, is called "negative harmonization." These are "thou shalt not..." rules - do not obstruct the movement of people, or of goods, capital or services.

Unfortunately, the EU has not been able to stop there. Nor is this entirely Brussels' fault. Many politicians in national capitals still look rather warily upon the prospect of opening up "vital" industries to competition from their neighbors, and a myriad of rules has been crafted to ensure that some rules do not place too great a perceived burden on this industry or that, or that one competitive advantage is offset by another elsewhere, and so on.

This horse-trading is deeply embedded in Europe's culture and history. In Modern Times, Paul Johnson described the original Treaty of Rome in 1957 as a bargain between France and Germany, in which France would provide a market for German industrial goods in exchange for Germany's supporting the French agricultural sector.

The deal worked not only because each got what it wanted most, but because both thought the price they were paying was worth it. And so it's been ever since. At each stage where a sacrifice was seen as being required, the lamb has extracted his pound of flesh in return.

This is not to say that there's anything wrong with this sort of exchange; it's natural enough. I rehash it here to remind the reader that the EU's grand project has never, in its actual development - as opposed to the rhetoric in which it is sometimes dressed - been about the universal advantages of free trade or enterprise. It's been about the careful balancing of interests. And too often, that balancing has taken the form of restrictive legislation design to tie down the most competitive to the advantage of the laggards. This process is being played out in fast-forward with the East European accession countries, which many current EU members would like to see burdened with as many growth-destroying regulations as possible before East and West open their markets to each in a year's time.

It is this model - in which free trade is tied to the equalization of regulatory and other burdens - to which the EU is committed. This is why it would like to see environmental rules enforced as part of WTO proceedings, and to see trade opening conditioned on minimum labor standards and other forms of "social protection." The downside of this, of course, is that it sells short the real advantages of open trade, and is wedded to a zero-sum or near-zero-sum view of trading relationships.

Ironically, the EU has nevertheless seen real advantages from even the somewhat limited trade opening that it has undergone internally. More of the same, externally and internally, would lead to still more gains for Europe and its would-be trading partners. But the EU sees mostly threats - to its economy, but mostly to its cherished social-welfare model.

Brian Carney edits the Business Europe column for the editorial page of The Wall Street Journal Europe.
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