Friday, 5 September 2003

PRE-CANCUN WTO MEETING REPORT SHOWS EU TRADE BARRIERS KILL ONE PERSON EVERY 13 SECONDS


A new report, EU Trade Barriers Kill, published today in the run-up to the
Cancun ministerial meeting of the WTO by the Centre for the New Europe, the
Brussels-based think tank, analyses the impact of EU trade regulations and
barriers on the developing word.

The text of the report, by Stephen Pollard, Alberto Mingardi, Dr. Sean
Gabb, and Cecile Philippe is below.

The key findings are:

· 6,600 people die every day in the world because of the trading
rules of the EU. That is 275 people every hour.

· In other words, one person dies every 13 seconds somewhere in the
world mainly in Africa – because the European Union does not act on trade as it
talks.

· If Africa could increase its share of world trade by just one per
cent, it would earn an additional £49 billion a year. This would be enough to lift
128 million people out of extreme poverty. The EU’s trade barriers are
directly responsible for Africa’s inability to increase its trade and thus
for keeping Africa in poverty.

· If the poorest countries as a whole could increase their share of
world exports by five per cent, that would generate £248 billion or $350 billion,
raising millions more out of extreme poverty.

Key extracts below

For more information, please contact:
Dr. Tim Evans (President, CNE) +44 07956 969523
Stephen Pollard (Senior Fellow, CNE) +44 07956 118035
Alberto Mingardi (CNE Italian Visiting Fellow) + 39 33 96 02 18 70
Dr. Sean Gabb +44 07956 969523

EU TRADE BARRIERS KILL

A CNE report (www.cne.org)

By Stephen Pollard, Alberto Mingardi, Cecile Philippe and Dr. Sean Gabb

September 2003

Introduction

Trade barriers imposed by the EU are more than just a technical issue. Lack
of access to the European market – by far the richest in the world – slows
development in the poorest countries of the world, condemns thousands of
millions of people to poverty and kills many others. This paper quantifies,
for the first time, the cost to Africa of EU protectionism.

Opening the European market to the products in which these countries have a
comparative advantage would greatly accelerate economic growth in those
countries. It would also be highly beneficial for consumers and business
within the European Union.

The Challenge of Population Growth

At the beginning of the 21st century, perhaps the greatest challenge we
face is world population growth. It took from the stone age to about 1800 for
world population to reach one billion. By 1930 there were two billion
people; there were three billion in 1960, four billion in 1974, five
billion in 1987, and there are six billion today. The rate of increase has been
slowing since the 1960s. Nevertheless, the increase continues at 1.2 per
cent per year – which means another 77 million people each year. Even if
growth were to slow during this new century, there looks still to be
between nine and 12 billion by the end of it.

Such figures bring to mind the warnings of Thomas Malthus at the beginning
of the 19th century. To summarise briefly – the most commonly available
edition runs to 284 closely printed pages – Malthus claimed that
population tends to increase geometrically; that is, 2, 4, 8, 16, and so on. The
quantity of land, however, is fixed, and the productivity of land can only
be increased arithmetically – this is, something like, 2, 4, 6, 8, 10, 12
and so on. For a few generations, increasing population is consistent with
rising living standards, as more people make it possible to work the best
land more efficiently. Thereafter, land of progressively lower quality must
be brought under cultivation until a territory is full. After this,
stagnating output must be shared between more and more people, until
average living standards fall back to the minimum required to sustain human numbers
at that current level. In time, a chance combination of misfortunes – wars,
famines, plagues, and such like – brings about a collapse of population.
And then the cycle begins again.

Malthus published in 1798 and 1800. Despite gloomy warnings in the early
decades of the 19th century, he was proved wrong in Britain, the country
about which he wrote in most detail. In 1800, the population of Great
Britain – excluding Ireland – was about eight million, most of whom lived
in grinding poverty. By 2000, the population had risen to about 60 million.
Yet far from this more than 700 per cent increase in numbers causing a lowering
of living standards, today even the poorest unskilled worker is better
clothed and better fed than all but the wealthiest in 1801, and has access
to goods and services that could not have been imagined before. This
country is hugely more populated than at any time in the past, and at the same time
incomparably richer.

This has been the experience not just of Britain, but of every other
developed country. Not surprisingly, by the 1950s Malthus had long been
relegated to the list of semi-unknown thinkers in economic history -
remembered for his development of the law of diminishing returns, which,
stripped of its pessimistic message, had been incorporated into the
structure of microeconomic production and distribution theory.

Since the 1960s, however, he has made a return to the centre of thought -
not economic, but demographic and ecological. The current burst of
population growth is in the poorest countries of the world. Over the past
few generations, these have been given some of the fruits of western
science and medical technology – and because they have acquired only part of the
whole, it has been decidedly a mixed blessing. In Europe and America,
modern science and technology grew slowly, and were accompanied by a long period
of self-sustaining economic growth and by changing habits of marriage and
reproduction. Clean water, cheap soap, good food, access to medical care -
these came with expanding opportunities and falling birth rates. In most of
Africa and South America and parts of Asia, they arrived suddenly – in
economies with little potential for growth and with reproduction habits
suited to keep populations stable in spite of high mortality rates.

By 2050, according to the United Nations Department of Economic and Social
Affairs, the population of the developing world will have risen from 4.9
billion to between 8.2 billion and 11.9 billion. In the 48 least developed
countries, population is expected to triple. By 2050, 90 per cent of
humanity will live in the developing world.

Put in global terms, the quantity of usable land has not greatly increased
in the past hundred years. Forests have been cut down in some places, and
desert reclaimed in others. But much of the land gained has been either
poor or usable only in the short term. The figure has been roughly constant at
39 million square miles . Dividing this by the population of 1930 gives 12
acres per head, by the population of 1974 eight acres per head, and by
today’s population just four acres per head. By 2050, we may be down to three
acres per head.

People need much more than is covered by their footprints. They need
somewhere to live and work, and somewhere on which food can be grown for
them. Even the most basic civilisation needs a mass of fields, roads,
factories, offices and shops. A wealthy civilisation like ours needs parks
and other recreation areas. Might it be, it is worth asking, that the
growth in numbers will indeed start to exceed the capacity of the planet. In which
case, when will the Malthusian nightmare of average living standards
falling to subsistence level, and of population growth being first checked then
reversed by famine, disease and war, come true.

In some parts of the world, this already seems to be happening. Income per
head in Sub-Saharan Africa as a whole has been declining in recent years.
It fell to $474 in 2000 from $552 per head in 1991 . Look at Malawi. The
climate is good, the country at peace. Yet its three million people are on
the edge of starvation. According to the Demographic and Health Survey
2000, published by the Malawian National Statistics Office, severe
malnourishment affects 26 per cent of under fives in rural areas and 13
per cent in urban areas the result of years of food shortages. Jeremy
Laurance adds:

Hunger, disease and poverty exact an annual cull of the population in
Malawi. The difference this year is that the cull has started early, in May
and June, which should be a time of plenty. At Mulanje mission hospital in
the south, 900 children were seen in the malnutrition clinic in May, a
record for that month, when the numbers should be falling.

Other famines in Africa – in Biafra, in Ethiopia, in Sudan – have usually
been a result of extremely bitter civil wars. The simple cause of hunger in
Malawi is that growth of between two and five per cent a year has taken the
population beyond the limits of a pre-industrial economy. The hungry are,
to use the grim phrase of Malthus, those ‘for whom no place has been set at
the feast of Nature’s bounty’.

In other poor countries, people may not yet be starving, but the growth of
numbers has raised an immense surplus population for which there is no work
on the land. Billions are leaving the land to settle in cities. In 1950,
New York was the only city in the world with more than 10 million people.
Today, there are 20 such cities, nearly all in the developing world. Again in
1950, two thirds of humanity lived in the countryside. By 2015, more than half
will live in the cities. Between now and then, African cities will grow
by 100 million people, and Asian by 340 million. Because of shortages of
capital and institutional deficiencies, these cities are home to some of
the highest structural unemployment rates in the world. As a result, they are
filled with crime, filth and disease. As Nairobi grew, for example,
municipal waste collection rates fell from 90 per cent in 1978 to 33 per
cent in 1998. People live in vast shanty towns without running water or
drainage.

Resource shortages are widespread. Throughout the developing world, there
are increasing shortages of water. The amount available per head has fallen
to about a third of its 1950 level, according to the United Nations
Department of Economic and Social Affairs. Today, there are 508 million
people living in countries with insufficient water, according to the
International Water Management Institute. By 2025, there will three billion
people living in such countries.

But we are not just talking about poverty and reduced life expectancy. In a
world which now has the technology to produce enough food for everyone to
enjoy a good basic diet, people are still dying from starvation.

Famine and wars cause just 10 per cent of starvation deaths, although these
tend to be the ones we hear about most often. The majority of starvation
deaths are caused by chronic malnutrition in countries that are at peace
and without unusual shortages.

In 1994, it was estimated that more than 800 million people in the world
went hungry. According to Oxfam in July 2002, every day, 24,000 people die
from hunger and other causes related to hunger. That is just over two
people per second. In developing countries, 6 million children die each
year, mostly from causes related to hunger.

Economic Growth as the Answer

Of course, this does not need to be. More people does not just mean more
mouths and more sexual organs. It also means more minds and more hands with
which to make the world a better place for everyone. The reason why Malthus
and his followers were so wrong about Britain was that rising population
was accompanied by an even faster rise in the amounts of physical and human
capital. Population density in modern Britain gives just one acre per head.
Not only is this enough to support an immense population by past standards,
we do not even use much of this land for direct production.

Nor is the success story limited to Britain and the developed world. It can
be seen elsewhere. It is actually quite easy to make a country prosperous.
It needs only security of life and property, and markets in which property
rights can be valued and traded. Those countries that have done this since
the 1950s have seen average living standards rise to near or equal those of
Europe and America. A generation ago, Malaysia, Singapore, Thailand, and
South Korea were poor countries. As recently as the early 1980s, their
incomes per head ranged from $700 to $7,000. Today, they range from £2,000
to more than $21,000. Since 1992, in spite of many problems inherited from
the past, Chinese average income has risen from $300 to $800 , with an
average economic growth rate of 9 per cent in the 1980s and 90s. Even
India, one of the great sinks of world poverty in the 1960s and 70s, is on
the road to prosperity. The country nearly suffered financial collapse in
1991. Its government reacted by cutting 40 years of bureaucratic control in
just seven hours. Since then, literacy has improved from 52 per cent to 65
per cent. 110 million people have raised themselves from poverty. The
economy is comfortably growing faster than population. There is a vast new
middle class of 250 million people. India is fast becoming one of the
leading exporters of computer software and services.

The great failure is sub-Saharan Africa. Though progress has been made over
the past decade, it has not been fast enough for economic growth to outpace
population growth. During the nine years to 1999, the number of those
living on less than $1 a day – this being the standard definition of extreme
poverty – increased by 23 per cent, to 300 million. This number is expected
to rise to 345 million by 2015.

Trade as the Engine of Economic Growth

One strategy for increasing the rate of economic growth in a country is to
allow trade with the rest of the world. This brings about greater
specialisation than would otherwise be possible. Sectors in which a country
has no comparative advantage shrink as a proportion of national output,
being replaced by cheaper or better imports. This releases resources for
those sectors in which there is an advantage. Because the world market is
larger than the domestic, production can be expanded, thereby enabling
economies of scale.

This has been the case for the developed world over the past 50 years,
where exports of manufacturing, agricultural and mining output have risen
consistently faster than output. Since 1981 for example, the volume of
world trade has grown at an average of six per cent a year – twice as fast as
world output.

It is difficult to provide specific and detailed empirical support to the
claim that foreign trade assists economic development. Those countries that
open their economies to the world also have liberal domestic economic
policies, and these, as we have already argued, contribute greatly to
development. Separating out the respective components of growth is a subtle
exercise. However, the broad consensus of opinion among researchers is that
there is enough of a connection between trade and development to suggest a
causal connection. According to David Dollar and Aart Kraay, writing for
the International Monetary Fund,

[p]er capita GDP growth in the post 1980 globalizers accelerated from 1.4
percent a year in the 1960s and 2.9 percent a year in the 1970s to 3.5
percent in the 1980s and 5.0 percent in the 1990s…. This acceleration in
growth is even more remarkable given that the rich countries saw steady
declines in growth from a high of 4.7 percent in the 1960s to 2.2 percent
in the 1990s. Also, the nonglobalizing developing countries did much worse
than the globalizers, with the former’s annual growth rates falling from highs
of 3.3 percent during the 1970s to only 1.4 percent during the 1990s. This
rapid growth among the globalizers is not simply due to the strong
performances of China and India in the 1980s and 1990s 18 out of the 24
globalizers experienced increases in growth, many of them quite
substantial.

It is widely acknowledged that it was trade which enabled the ‘Asian Tiger’
countries – Japan, Hong Kong, South Korea, etc – to develop as
manufacturing economies. Opening their economies to the rest of the world allowed them to
attract the investment in physical and human capital that brought them
comparative advantages in the manufacture of a widening range of products.

It could be the same story for the very poorest countries now. For one
thing they tend to have advantages in agricultural or textile production. For
example, if Africa could increase its share of world trade by just one per
cent, it would earn an additional £49 billion a year. This would be enough
to lift 128 million people out of extreme poverty. If the poorest
countries as a whole could increase their share of world exports by five per cent,
that would generate £248 billion or $350 billion, raising millions more out
of extreme poverty.

European Protectionism

For the most part, however, this option is not available. Four main
countries or trading blocs – the European Union, the United States, Japan
and Canada – account for 75 per cent of world output. They are the obvious
destinations for exports from the poorest countries. Yet while these
countries talk endlessly about the liberalisation of world trade, they have
been ruthless in keeping their domestic markets closed to agricultural and
textile exports from the poorest countries. According to the International
Monetary Fund,

In industrial countries, protection of manufacturing is generally low, but
it remains high on many labor-intensive products produced by developing
countries. For example, the United States, which has an average import
tariff of only 5 percent, has tariff peaks on almost 300 individual
products. These are largely on textiles and clothing, which account for 90
percent of the $1 billion annually in U.S. imports from the poorest
countries – a figure that is held down by import quotas as well as tariffs.
Other labor-intensive manufactures are also disproportionately subject to
tariff peaks and tariff escalation, which inhibit the diversification of
exports towards higher value-added products.

The United Nations Conference on Trade and Development (UNCTAD) agrees.
According to spokesman Richard Kozul Wright,

Most middle income developing countries persist in labour intensive
manufactures because their producers are finding it difficult to upgrade
and diversify.

The worst of the rich protectionists, however by far – is the European
Union. It has roundly condemned the American steel tariffs imposed earlier
this year. Martin Bartenstein, the Austrian Economics Minister, says, for
example:

There is no other reason than to protect an old steel industry in parts of
the US which in the opinion of any steel expert in the world is simply not
competitive any more.

There are few clearer examples of ‘do as I say, not as I do’. The European
Union as a whole does not apply this logic to its own uncompetitive
sectors. In its April 2002 report, Rigged Rules and Double Standards, the leading
aid charity Oxfam placed the EU first in its league of hypocritical free
traders. It elaborates these charges in a further report.

The EU runs two sets of protectionist policies that could be almost
designed to wreck the trading chances of those of the poorest countries that have
comparative advantages in food and textiles.

First, there are the trade restrictions. Though the EU has a low industrial
tariff of five per cent, its agricultural tariffs are far higher. These
average 20 per cent, but rise to a peak of 250 per cent on certain
products.
For example, the tariff on Bolivian chickens is 46 per cent, and on
Bolivian orange juice 34 per cent. On textiles, there are strict quotas on most
important lines. These have been reduced or removed in the case of fairly
unimportant products such as parachutes and umbrellas. But the European
market remains barely open to the majority of low cost textiles from the
developing world.

The European Union does grant preferential access to some developing
countries, but these concessions tend to grant access to those products in
which the exporting countries do not have any substantial advantage. For
example, India and Pakistan are not given preferential access for their
leather goods and textiles. Also:

The sheer complexity of the EU’s tariff regime may be considered to be a
barrier in itself, particularly for those poor countries with weak market
intelligence: there may be nine or more different rates that apply to the
same product, depending on where it was produced.

Added to open trade barriers are the complex rules of origin applied to
imports from the developing world. These stipulate how much of a product
must be made from local inputs to qualify for the preferential tariffs.
According to a report published by the Centre for European Policy Studies,
only a third of imports from developing countries eligible for preferential
access are able to meet the strict criteria to comply with the rules of
origin. The authors explain the probable intentions here:

It is rules of origin, such as those discussed above, which underlie the
analyses of Krueger (1995) and Krishna and Krueger (1995) who demonstrate
how rules of origin can act as ‘hidden protectionism’ and induce a switch
in demand in free trade partners from low-cost external inputs to higher-cost
partner inputs to ensure that final products actually receive duty free
access. With the apparent aim of preventing trade deflection, rules of
origin can be used to protect a domestic industry from unwanted competition
based in the partner, even in conditions where trade deflection is unlikely
(Falvey and Reed (1998)). Note that in this situation the EU is unlikely to
exert pressure on the trade partner for the general liberalisation of
tariffs against other trading partners. James (1993) argues that as the
degree of protection offered by the common external tariff in the EC has
diminished increasingly restrictive rules of origin have become
commonplace.

Even if an exporter from the developing world is able to comply with these
regulations, there are then the further regulations on health and safety.
These have a protectionist effect, and that again may be their intention.
For example, one regulation requires that milk should be taken from cows by
machinery and not by hand. This effectively shuts out all Indian milk
products, which would otherwise, admittedly, enter only at prohibitive
tariffs of between 76 and 144 per cent.. Again, complex rules on
aflotoxins cost sub-Saharan Africa $1.3 billion every year in lost exports of cereals,
dried fruits and nuts per European life allegedly saved thereby.

But even if an exporter from the developing world finds ways round these
barriers, there is then the threat of so-called anti-dumping regulations.
These are threatened when an exporter is claimed to be selling in the
European market at below cost of production. But, according to Oxfam,

the fact that a high proportion of the investigations do not lead to the
imposition of duties suggests that the measures are used largely for
harassment. EU action against imports of Indian bed-linen illustrates the
problem. From 1997, anti-dumping duties as high as 25 per cent prevented
the company Anglo-French Textiles, among others, from selling bed-linen to the
UK. As a result, the company’s turnover fell by more than 60 per cent,
causing the loss of 1,000 jobs. In 2001, the WTO ruled that the
anti-dumping measures had been unjustified….

These rules reduce trade between the EU and the developing world. They also
filter out exports of value-added products from the developing world. In
February 2002, for example, Tony Blair visited a cocoa farm in Ghana. This
is a collective enterprise set up by the Comic Relief charity. It is a
great success. The cocoa is good and has a ready market in Europe – which has no
cocoa sector of its own and so does not penalise imports.

It could be a greater success, than it is, however, The cocoa is used to
manufacture a brand of chocolate bar called Dubbles. These are not
manufactured locally, but in Germany. The reason: tariffs would raise the
price of Dubbles by 10p a bar if manufactured outside the European Union.
As with all primary products, the world price of cocoa is highly volatile,
rising and falling according to how much is produced. The price of
manufactured confectionary is highly stable.

In this respect, the EU is thus effectively taking a choice joint of meat,
chewing off all that is tasty and nourishing, and tossing the bone to a
malnourished dog – and then preening itself on how generous and caring it
is.

Second is the agricultural subsidy handed out by the EU under the rules of
the Common Agricultural Policy. This amounts to $41 billion a year, or
$14,000 per European Union farmer (though half the spending goes to the
biggest 17 per cent of farming enterprises). The CAP subsidy affects
agricultural producers in the developing world in three main ways:

1. It completes the effect of tariffs and other barriers in shutting them
out of a market in which they would otherwise have a comparative advantage.
For example, the EU spends $2.7 billion each year on subsidising European
farmers to grow sugar beet, while it maintains high tariff barriers against
sugar imports from the developing world.

2. It generates immense surpluses of foodstuffs that cannot be sold within
the EU at the prevailing intervention prices. Much of these surpluses are
exported at very low prices that undercut those charged by the unsubsidised
producers of the developing world. A prime case of this is sugar sales in
the Middle East. Countries like Sudan are crowded out of the sugar market
in Egypt and Saudi Arabia.

3. Some of the surpluses are exported at subsidised prices to developing
countries, thereby crowding out domestic producers. In Jamaica, some 3,000
dairy farmers are being driven out of business by imported milk powder from
the EU. 5,500 metric tons are sent there each year at a cost to the
European taxpayers of $3m. Many of the farmers are women.

Politicians and opinion formers in the developing world know exactly where
the problem of poverty lies. According to Yoweri Museveni, President of
Uganda, world hunger is not caused by of lack of technology, or of any
other event that can be dismissed in the rich world as insoluble. Speaking at the
United Nations World Food Summit, held last year in Rome, he said:

Let us stop beating about the bush. The most fundamental problems are not
the weather, are not lack of improved seeds. The main causes of food
shortage in the world are really three: wars, protectionism in agricultural
products in Europe, the USA, China, India and Japan, and protectionism in
value-added products on the part of the same countries.

The Human Cost of Protectionism

24,000 people die every day from starvation, or from causes directly
related to malnutrition. Let us make a reasonable assumption, erring on the side of
caution – that 20,000 of these people do not die from the purely local
causes of civil war and crop failure.

In a world of potential abundance that could be made actual by more open
trading rules, the European Union accounts for a third of trade protection.
Thus given the earlier assumption – 6,600 people die every day in the
world because of the trading rules of the EU. That is 275 people every hour
of the day.

In other words, one person dies every 13 seconds somewhere in the world
mainly in Africa – because the European Union does not act on trade as it
talks.

These are questionable, if not unreasonable, figures. But what is
unquestionable is that the developing world would develop faster given
access to markets in the rich world, and that the EU has deliberately
hindered access to its own markets, Free trade with the European Union
would lift countless millions of these people from wretchedness to comfort – or
at least to hope of comfort in the future.

When an earthquake or a famine strikes a region of the developing world,
our sympathies are moved, and we donate large sums of private and public money
for the alleviation of misery. But places like sub-Saharan Africa are
experiencing a quiet disaster every day because, in large measure, of trade
barriers.

In the next 15 years, the number of those living on no more than $1 a day
will rise by 15 million. Much of this, no doubt, is the result of domestic
misgovernment, and of natural misfortunes that are the fault of no one. But
look at those Ghanaian farmers, condemned to growing cocoa and shut out of
the more profitable confectionary market. Look at those Jamaican dairy
farmers, and those Bolivian poultry farmers. If they are poor, they are
partly kept poor by the trading rules made and strictly enforced by the EU.

If we want the 90 per cent of humanity who by the middle of this century
will live outside the rich world to enjoy anything like the living
standards we take for granted, it is not enough for us to drop a few coins into a
collecting box every time the media reminds us of their suffering. We need
to buy from them. We need to open our markets. We need to make sure that,
year on year, they have the same chance that we gave the Japanese and other
poor manufacturing countries, to attract foreign investment into their most
productive sectors, by giving those investors an open market to sell what
is produced. Do we want a 2050 in which every household in the world has a
refrigerator. Or do we want a world in which we can sit back in our own
continuing comfort and congratulate Malthus on having been right all along.

The Benefits of a Humane Trade Policy

One of the problems of getting a more decent trading policy from the EU is
that it is nearly always demanded in the name of humanity. The assumption
on all sides is that allowing free trade will help the developing world at the
expense of the rest. European policy makers are asked to do something out
of the goodness of their hearts, even though it will to some extent hurt. In
this sense, calls for free trade are rather like begging for alms, where
the donor receives nothing in return except a vague feeling of having done
something righteous. This is not, however, the best way to get anything out
of people who – though perhaps charitable themselves – see themselves as
the agents of the peoples of the EU, and are surrounded by dozens of persuasive
and well-funded interest groups all pushing for not less but more
protectionism.

The approach makes no sense in terms of public relations. It also makes no
sense in economic terms. The developing world would, as we have shown,
benefit greatly from free trade with the EU. But so would the EU. Trade
negotiations should not be seen – as they universally are outside the
economics profession – as a zero sum game, in which each side comes to the
table aiming to get the maximum outlet for its own exports while opening
its own markets for the minimum possible number of imports. They are instead an
opportunity for both sides to benefit equally, if in different ways.

The guiding fallacy of modern trade negotiations was summarised by the
American Congress in the 19th century:

Every additional yard of [cotton] good thus brought into our market will
displace a yard of American-made goods…. [A] large part of the money that
is paid to American employees will be aid to the foreign laborers.

Abraham Lincoln is said to have been blunter still:

If I buy a coat from England for $10, I have the coat and the English have
the $10. If I buy a coat from America for $10, I have the coat, and
Americans have the $10.

This is an absurd fallacy, albeit one to which many supposedly intelligent
people still adhere today. To stay with the Lincoln claim, buying a coat
from England does not take any money out of the United States. $10 is
turned into the current value in pounds, which are then spent in Manchester. The
$10 is only accepted on the foreign exchange because there is someone with
pounds who wants dollars with which to buy something from the United
States, or who wants to invest in the United States. Trade across frontiers does
not drain money from a country. It simply transfers money within the country,
which is then spent or invested in that country. It will be used to expand
a sector in which the country has a comparative advantage, and will raise
incomes within that country and throughout the world as a whole.

A more rational view of foreign trade was taken by Adam Smith in the 18th
century:

It is the maxim of every prudent master of a family never to attempt to
make at home what it will cost him more to make than to buy. The tailor does not
attempt to make his own shoes, but buys them of the shoemaker. The
shoemaker does not attempt to make his own clothes, but employs a tailor. The farmer
attempts to make neither the one nor the other, but employs those different
artificers. All of them find it for their interest to employ their whole
industry in a way in which they have some advantage over their neighbours,
and to purchase with a part of its produce, or what is the same thing, with
the price of a part of it, whatever else they have occasion for.

What is prudence in the conduct of every private family can scarce be folly
in that of a great kingdom. If a foreign country can supply us with a
commodity cheaper than we ourselves can make it, better buy it of them with
some part of the produce of our own industry employed in a way in which we
have some advantage.

John Stuart Mill, writing in the 19th century, took the attack on the
fallacy still further. The whole value of foreign trade, he said, lies in
the imports. Exports in themselves are a pure loss. A business acquires
land, labour and capital, and uses scarce resources; it produces things
that are of value; and then it sends them out of the country to be consumed by
foreigners. If in exchange, it received only gold and silver or banknotes,
these would do nothing to increase the real income of the country. Exports
are only worthwhile when the money thereby gained is used to spend or
invest in foreign countries – this latter being beneficial so far as it enables
future imports without the disagreeable necessity of exports. He says:

[T]he only direct advantage of foreign commerce consists in the imports. A
country obtains things which it could not have produced at all, or which it
must have produced at greater expense of capital and labour than the cost o
the things which it exports to pay for them.

Of course, protectionism does benefit particular interests within a
country; and the main interest supposed to benefit from European protectionism is
agriculture. But this is an argument that needs little demolition. European
farming is generally in a bad state. In every continental member state,
there has been a rapid fall in the number of farmers since the 1950s. In
Britain, farming is in a catastrophic decline. Even before the BSE scare
and the devastation of the 2001 foot and mouth epidemic, farming incomes had
been falling for a generation. Indeed, in Britain, where most farming land
is rented, high prices and subsidies have given farmers only a short term
increase in profits, which have then been eaten away by higher rents.

EU agricultural policies hurt farmers in the developing world. They hurt
consumers in Europe by raising the price of food. They hurt
non-agricultural produces in Europe by diverting income that would otherwise not be spent on
food. They encourage environmentally damaging farming practises. They do
not materially assist the majority of European farmers. The main beneficiaries
are a few big agri-business combines, and the politicians and bureaucrats
who supervise the whole system. This was seen clearly by Adam Smith:

That it was the spirit of monopoly which originally both invented and
propagated this doctrine [of trade protection] cannot be doubted; and they
who first taught it were by no means such fools as they who believed it.
In every country it always is and must be the interest of the great body of
the people to buy whatever they want of those who sell it cheapest. The
proposition is so very manifest that it seems ridiculous to take any pains
to prove it; nor could it ever have been called in question had not the
interested sophistry of merchants and manufacturers confounded the common
sense of mankind. Their interest is, in this respect, directly opposite to
that of the great body of the people. As it is the interest of the freemen
of a corporation to hinder the rest of the inhabitants from employing any
workmen but themselves, so it is the interest of the merchants and
manufacturers of every country to secure to themselves the monopoly of the
home market.

Further Benefits of Free Trade

There are further benefits to be had from allowing free trade with the
developing world. Briefly stated, these are:

- It will reduce the pressure of migration from the developing world
to the rich world. There are currently 50 million refugees in the world, many of
them trying to find asylum in Europe and America. These people are mostly
fleeing evils that are the effect of low economic growth in their home
countries. Higher barriers to immigration are unlikely to stem the flow
into countries that are seen as lands of opportunity. The Rhine and Danube
frontiers of the Roman Empire and the Great Wall of China were failures at
preventing the movement of peoples. Our modern equivalents will have no
more success. The only answer is to try keeping the migrants at home, by
providing them with jobs and worthwhile life chances. Free trade will help
with this.

- It will reduce damage to the environment. Economic growth in itself
is not a threat to the environment. The richest countries are generally the least
polluted, because there is demand and money for cleaner production
processes. In general, the really nasty pollution of this century is likely
to come from the developing world, where there is no money to fund more
environmentally friendly systems of production.

- It will reduce the water shortages that now plague much of the
developing world. Egypt and Sudan, Turkey and its neighbours, and many other
countries, are permanently in bad relations with each other because of water
extraction from the rivers that flow through them. The Nile and Euphrates do not
deliver enough water for everyone, and so there is endless temptation to
take more upstream regardless of who suffers downstream. At the same time,
these countries have extended sea coasts, and the technology exists to
provide all the water anybody could want by desalination of se water. All
that is missing is the money to finance these plants. Let free trade raise
incomes in these countries, and the money will be there.

- It will reduce population growth. It is a commonplace that educated
women have few children than uneducated. Either they have enough learning to want
better rom life than producing another baby every 11 months, or they have
jobs and careers that put them off having children. The main barrier to
universal female education is lack of finance. Free trade will provide the
finance.

Conclusion

For the European Union to open its markets to the poorest countries of the
world is the moral, humane thing to do. It is also directly of benefit to
the true interests of European consumers and producers, and the interests
of everyone across the planet. It is not a question of giving something away,
but of helping create a plenty in which all will share.

The Authors:

Alberto Mingardi is a leading Italian journalist and scholar. He is also a
Visiting Fellow at the Centre for the New Europe: www.cne.org

Cecile Philippe is a French academic and writer. She is also the director
of
the major French free market think tank the Molinari Institute:
www.institutmolinari.org

Stephen Pollard is a prolific journalist who lives and works in London. He
is also a visiting fellow at the Centre for the New Europe: www.cne.org and
www.stephenpollard.net

Dr. Sean Gabb is editor of Free Life, the journal of classical liberal
ideas. He is also a prolific writer and lectures in the social sciences:
www.seangabb.co.uk