FREEDOM - NOT A FREE FOR ALL
(speech to Freedom Association & City of London, Autumn 2009)
Pressed to find
something positive to say about the European Union its apologists often
refer to the EU's 'four freedoms'. These, they insist, are what the EU is all about. Commission spokesmen frequently make such claims. Politicians
love to bestow gifts at no personal cost to themselves but most gifts have cost
implications and pointing out where the burdens fall is unwelcome.
The freedoms to which they refer are to the movement of persons, goods, services and capital.
Article 4 of the failed Constitutional Treaty states that: "Free movement of persons, services, goods and capital and freedom of establishment shall be guaranteed within and by the Union in accordance with the Constitution ".
FUNDAMENTAL PRINCIPLE
If you look up the website of the Department for Business Innovation and Skills you will find stated “The free movement of goods, persons, services and capital is a fundamental principle of the European Union.”
Curiously, such claims have almost entirely escaped critical scrutiny, perhaps because freedom is one of those concepts which, like motherhood and apple pie, are difficult to criticise. There have consequently been few who have questioned whether the European Union really does embody these freedoms and to what extent their application is unequivocally a good thing. The other reason that free movement escapes criticism is that it meshes in with the idea of globalization which has many free market enthusiasts who want free movement throughout the world.
SOME PRELIMINARIES
We have a problem with the word ‘free’ in the English language as it encompasses two meanings. Our Italian friends have two words – ‘libero’ and ‘gratituito’. They translate into English as ‘free’ and ‘free of charge’. The same in the other romance languages, such as French, ‘libere’ and ‘gratuit’.
I understand ‘free’ in the English tradition as being ‘absence of restraint’ but also a freeman is a person of responsibility who takes charge of himself and his family, as well as contributes to his local and national community.
‘Free’ education, ‘free’ health services, etc. are, of course, quite different – they fall into the ‘gratuito’ class.
It would have been sensible to take a closer look at what was meant by the ‘four freedoms’, who benefits from them and who pays for them. It is assumed by the three British political parties that no-one could possibly object to them and they never refer to the costs or who pays these.
One other major point has to be mentioned at the beginning. It is measurement. Without correct accounting, one cannot make sense of anything. David Cameron recently said he did not want the Tory party to be flint-faced, turbo-charged accountants’ – well that’s wrong – but what is interesting is how accountants have become declasse. They sit beneath the salt while economists get peerages and Nobel prizes. On a personal note, about 25 years after I left university a contemporary became an Accountant-General in the Department of Education without any financial qualifications. He had been a Secretary to Edward Heath. Yet accounting has a far nobler tradition. After all, we remember Leonardo da Vinci probably the most intelligent man who lived since the time of Christ and he was taught by Fra Luca Pacioli who is famous for his writing the first book on accounting – his Summa Arithmetica.
The supremacy of economists, and I speak as both, over accountants and, frankly, the failure of accountants to engage with government finance (note David Cameron said he would have trained financial directors in all departments) has meant that, despite rigid rules for corporatees and other entities, UK governments have never seen fit to produce I&E and balance sheets either for themselves or for nations. US and Australia, for example, GDP figures are produced monthly but no corresponding balance sheet which makes it quite laughable when commentators refer to us getting richer or poorer from these figures. Extra capital or labour increases GDP but should be reflected in the liabilities side of the national balance sheet. Proper accounting requires proper I&E and balance sheets for the nation and also for the government, separately, but part of the nation. When we had the gold standard this was less important but in a sea of flat money, only the joint production of I&E and balance sheets gives us the knowledge to steer by. Needless to say, GDP per head requires population totals as well (US & Japan).
The two questions I will address today are:
1) Does the EU really uphold the free movement of goods, persons, services and capital?
2) Are these principles good in themselves?
MANAGERIAL PHILOSOPHY
The EU was conceived in more protectionist times as a Customs Union. What is meant by ‘the free movement of goods and services’ in eurospeak is the free movement within the EU, with the Commission determining what may and may not move freely within the EU (the beef bans) and also determining – by means of tariffs, quotas and anti-dumping duties – what can and cannot enter the EU and regulating the prices tariff of agricultural products.
Recent illustrations that the EU departs fundamentally from the principle of free trade include the dispute over the imports of clothing from China and the failure of the EU to meet the goals set at the Doha round because of its determination to preserve the CAP.
Remember the extra prices to consumer brought about by the CAP increases food costs and, therefore, depresses the living standards of the poorest people in the UK. It also disturbs the natural pattern of British trade and produces a permanent deficit in goods trade with the EU, misallocating resources.
If there were a genuine free movement of goods and services Britain would be in the position of being able to purchase the products it needs on world markets at lower prices. Indeed, the concept of regulated free movement of industrial goods within the EU amounts to what Patrick Minford refers to as 'the common manufacturing policy' the objections to which are identical to those which apply to the CAP. But while there is scarcely a single British MP who is prepared to support the CAP the EU policy on manufacturing - which is just as damaging economically - escapes criticism. Prices to consumers are kept up, there is a bureaucracy and, because there is a structural deficit in industrial goods with the EU, buying within the customs union transfers wealth to continental producers.
Meanwhile, another trade-distorting monster - the Financial Services Programme - threatens further limits in the free trade of services – it is a Common Financial Policy, the CAP again.
There is a constant demand from eurosceptics to reconstruct the basis of Britain’s relationship with the EU on the basis of a free trade agreement, often adding the words, “which is what we thought we were voting for in 1975”.
Well a quick read of the YES and NO pamphlets from 1975 will inform you that the YES campaign was quite open that the EU was not a free trade area and the NO campaign specifically called for a free trade area between the UK and the EU, which was voted down.
However, I do think eurosceptics have not paid serious attention to a post-EU Britain. Without using direct quotes, I think it is fair to say eurosceptics want a free trade agreement with the EU.
It should be noted that an FTA is partly a contradiction in terms. While an FTA may allow the two parties free trade in each other's home markets, it also assumes a measure of discrimination against goods purchased from a country not party to the agreement.
The analysis of an FTA's advantages depends on what sort of trading regime an independent Britain chooses to have. To call for an FTA prior to this basic decision is to put the cart before the horse.
What about freedom of movement of capital and persons?
It cannot be said that the EU has been the major engine of change in liberating capital flows. It has gone along with the flow.
As regards freedom of movement of persons, the EU has been highly enthusiastic. Free movement of people brings tears to their eyes. It has widened the original idea of allowing EU natives to work in other EU countries to introduce a whole panoply of ‘rights’ for EU citizens to start businesses, study on the same terms as nationals, commit crimes and still reside in other countries. Moreover, the ‘rights’ have been extended to non-EU immigrants so you have a large Somali community legally resident in Holland suddenly upsticks and move to the UK quite legally. The notorious directive 2004/58/EC gives rights to social assistance and residency.
The EU loves this. Barroso actually said “Sometimes I like to compare the EU as a creation to the organization of an empire.”
The reason is this … The EU believes that EU nationals who work or study in non-native countries are likely to be supportive of the EU political order and, therefore, the more of them the better. Further, a new idea has taken hold among EU policy makers which is that immigrants from outside the EU will become special supporters of the EU as they will have no conflicting national loyalty. A recent poll showed 85 per cent of immigrants to the EU were enthusiastic about the EU. So, Barroso is now proposing issuing blue cards to 20 million workers with the right of ‘circular’ immigration.
Weakening national identity is a core aim of the EU and means the EU has paid a lot of attention to the freedom of movement of people.
Look, all rising political orders have taken an interest in the demographic realities of their day. It is the natural preoccupation of those in power.
Failure to do so is the mark of a polity in decline.
So, to sum up, the EU is in favour of free trade on its own terms, that is, regulates trade within a Customs Union. It is mildly in favour of free movement of capital and it is enthusiastic about the free movement of people.
ARE THESE PRINCIPLES GOOD IN THEMSELVES?
Economists separate movement of goods and services, which are called trade, from the movement of capital and persons, which are the movements of factors of production.
As the NRC pointed out there is a difference in concept ‘an immigrant who comes permanently to the United States competes with natives for every year of his or her working life. Trade is a flow, dependent on exchange rate and trade policies.’ More important, trade has no effect on the accumulated wealth of an economy. An influx of people has an enormous effect, more people sharing the same wealth mixing up trade with factor movements is mixing up stocks and flows.
IS FREE TRADE A GOOD THING?
Well, we are all familiar with Ricardo’s theory, which is quite incontrovertible. It is, howevere, based on the factors of production remaining static. Mutual trade produces benefits.
One could point out that John Stuart Mill examined Ricardo’s theory in his 1844 essay ‘Essay on some unsettled questions of Political Economy’. He found that, while there are benefits, the exact split of the benefits between one country and another depends on the underlying balance of supply and demand and that these can be manipulated by tariffs to take advantage.
Further, Ricardo’s and Mill’s arguments depended on certain qualifications being fulfilled especially the reliance on gold as the balancing mechanism.
It is quite evident in the modern world that the existence of an international capital pool based on flat money muffles the effects of trade flows. Unlike the automatic stabilization inherent in simple gold based currencies, the existence of this pool of flat money can mask underlying trends so ultimate adjustments can be severe. Indeed, the adjustment may be so severe that all the previous benefit is cancelled out.
In general, I am a free trader when factors remained fixed but I recognize Mill’s and, recently, Paul Samuelson’s qualifications and recognize that flat capital pools create dangers. Like poor accounting, they distort reality.
FREE MOVEMENT OF CAPITAL
In the modern world what is often confused with or mixed up with free trade is the free movement of the factors of production, capital and persons. We will leave out entrepreneurs and the question of land and natural resources which cannot move.
One justification for capitalism is that increased capital supply provides a greater demand for labour and, therefore, higher wages. Reduction in capital supply reduces demand for labour and, therefore, wages.
One problem, it is possible to argue that capital does not move unless the owners of capital have moved - actually emigrate. After all, the capital owner expects to get this capital back plus an extra return, so capital movement by those not intending to emigrate is not real capital movement as they expect a) stream of income, b) return of capital.
So let us be clear. Where we talk about the movement of capital, we are conflicting two phenomenon. One is emigration of persons with their capital – in simple terms, their equipment, as the USA or Australia – the other is loans abroad by persons who want an income stream and return of capital but do not move themselves.
Proponents of allowing capital outflows state that even if reduction in capital supply reduces home labour wages that is still best because a) it cannot be prevented, b) if capital could not flow abroad, savings would be reduced.
These are very good and, indeed, in their way incontrovertible arguments. If a country is uncompetitive, it is better that the capital of that country should continue to increase and earn returns overseas.
What I want to draw attention to is that some movements of capital have different effects to others and, therefore, as regards the country from which capital is removed there is a ranking structure in possible gains or losses. Please look at the table I have prepared and you can see that certain capital movements have different results than others.
My point is this. If we can rank the benefits and disbenefits of capital movement surely we can say that certain capital movements are more beneficial than others.
The decisions about capital movements are taken by capital owners. Consumers and labour are passive. There are further complications. Capitalists will try to socialize losses and privatize profits. Lobbying and wars may benefit British capitalists but impose a tax on the rest of society. BP Mittal.
FREE MOVEMENT OF PERSONS
The EU idea was originally to allow workers to seek work in any EU country. Later we had ‘freedom of establishment’, claims on social services, third country nationals allowed to circulate, human rights’ enforcements, etc.
So, when discussing free movement of labour within the EU we are discussing the economics of immigration which is a transfer of stock. A receiving country within the EU has two shocks. First an increase in labour supply and, second, an increase in the number of persons trying to use a country’s accumulated wealth. This includes students, pensioners and welfare cases.
There is a complete difference between that and trade, stock and flow.
BENCHMARK
The fundamental benchmark is that of the NRC, ‘If immigrants have exactly the same skill distribution as domestic workers and if they have brought sufficient capital with them to maintain the US capital/labour ratio, then natives will neither benefit nor lose from immigration.’
The amount of capital per worker is £150,000. If they do not have this there is crowding in, diverting natives’ capital to supporting immigrants. A big total.
The effect on GDP is a tiny benefit but has severe distribution effects on poorer competing labour.
The question is, ‘How does the immigrant accumulate his share of the pre-existing capital and wealth built up over generations and centuries.’ On the face of it, adding immigrants without capital must reduce capital and wealth per head.
FISCAL EFFECTS
Borjas says ‘The welfare state is specifically designed to transfer resources from higher income to lower income persons. It is downright ridiculous to claim that low skill immigrants somehow end up being net contributors to the public treasury.’
or
Milton Freedman ‘It’s just obvious ……. You cannot have free immigration and a welfare state.’
OTHER COSTS
Remittances
Cultural costs
Opportunity costs such as lower education for natives.
Many free market economists equate free immigration with free trade. They like globalization as well but at least globalization does not reduce the wealth of lower income people even if it reduces their wages.
To consider the standard of living of a country’s inhabitants we must not only take account of the income and expenditure account or GDP but also the wealth or balance sheet. Standard of living does not only depend on GDP, it also depends on accumulated wealth, which is not reflected in GDP except for marginal additions. One can conclude that the free movement of persons is a massive cost to countries receiving immigrant workers or students.
To sum up the economic effect of freedom of movement, if you import an immigrant family with two workers on average British wages, you are effectively writing a cheque on the British taxpayer for £315,000 to provide the capital they need. If they go on social assistance, the cost soars. If there are cultural costs, it goes higher still.
The UK specifically suffers because, as the BBC reported in 2008, ‘But many … Tamils and Ghanaians in Milton Keynes said getting their children educated in English was a key factor in deciding to migrate a second time’. Frattini’s proposals for ‘circular migration’ will intensify this movement.
WHO IS AFFECTED?
Economic theory predicts the greatest impact of the EU, globalization and immigration will be on those on lower incomes. Elites are insulated, rely on mastery of native culture and like cheap labour. As Caldwell says they keep talking about restaurants.
Professor Borjas explains why blacks and previous immigrants suffer most from the new wave of mass immigration. ‘It turns out that African-Americans are likely to lose from immigration for two different reasons. First, it is employers who receive the bulk of the benefits from immigration (Blacks own about three per cent of the capital stock of the US while proportionately they are rather over ten per cent of the US population). Because blacks and immigrants are relatively more similar than whites and immigrants (in economic characteristics) any adverse impact of immigration on competing workers will fall hardest on the population of native-born African-Americans.’
WHY DO POLITICIANS LIKE IT?
Politicians gain power in a diverse society. There are simply more problems and more complications. The multiplication of welfare activities by the government and the increasing layers of government and regulation by the EU places an increased premium on the activities of those who are in the control seat – the politicians – as well as , of course, providing comfortable and well paid jobs. Incidentally, this is a reason often put forward in Switzerland for not joining the EU – it would add to the power of the government in Switzerland itself. All these issues increase the role of government on society and the economy and make voters dependent on government programmes and the political class which guarantees these programmes.
As Caldwell says in his book, Reflections on the Revolution in Europe, ‘If Europe is getting more immigrants than its voters want, this is a good indicator that its democracy is not functioning. European leaders have chosen to believe something different; that its immigration and asylum policies involve the sort of non-negotiable moral qualities that you don’t vote on.’
Going back to the distinction between ‘libero’ and ‘gratuito’, there is undoubtedly a ‘gratuity’ both for immigrants who move without capital and also for politicians who accumulate more power and parade their morality. But the ‘gratuity’ has to be paid, by the poorest members of the receiving country.
APPENDIX
Broadly, Britain would have three choices.
First, it could declare for unilateral free trade, as favoured by Patrick Minford. Second, it could retain the tariffs and protective trade regime of the EU as presently constituted, with the regime administered by Whitehall and the proceeds of tariffs going to the UK Treasury instead of Brussels. Third, it could introduce a modified controlled trade regime with fewer restrictions than presently organized by Brussels but administered by Whitehall.
Minford points out the benefits for the UK of declaring unilateral free trade.
These are that the UK would now buy all its goods at world prices.
Not only would EU manufacturers, who sell far more industrial goods to Britain than vice versa (a net deficit of £20 billion p.a. for the UK), be forced to compete with manufacturers outside the EU, which would reduce prices, but also the hidden price rises through actual and threatened anti-dumping and other restrictive mechanisms of the EU, which do not necessarily show up in the trade figures, would be got rid of. In other words, declaring free trade in industrial goods would be similar in its effects to leaving the CAP.
The second advantage is the general economic point that free trade corrects misallocation of resources in the UK, a basic point in economic theory.
Preferential Access
Minford concludes that if Britain declared unilateral free trade there would then be no possibility of an FTA. Why? "This is to miss the point of a customs union in which there is horse-trading between the producers of different countries paid for by the consumers; if a country refuses to trade by penalizing its consumers, it has nothing to offer". He adds, "Were the UK to be outside and let its consumers receive world prices,continental EU countries would be mad to let UK producers have access to their markets at preferential customs union prices; this would amount to asking their own producers to transfer 'profits to UK firms with no quid pro quo".
So if it is impossible to have an FTA in the event of Britain declaring unilateral free trade, what is the relevance of an FTA under the other scenarios?
The Other Scenarios
The two other scenarios are that Britain retains the Brussels' industrial goods regime either wholly or partly under pressure from commercial interests. It should be noted that if Britain administered its own trade regime from Whitehall it would make three undoubted gains. First, all duties would accrue to Britain not Brussels. Second, it could eliminate dumping and even more the threat of dumping rules, voluntary restraints and all the rest of the Brussels panoply which push up prices. These are the equivalent of the effects of the CAP in pushing up costs to the consumer when buying food. The third effect is more subtle. Basically, the wider the area of a customs union the larger number of producers and special interests which are created, all of whom press for antidumping duties, tariffs and trade restrictions. At present UK consumers may pay higher prices for goods in which there is little or no UK production because we are in a customs union with EU countries that do have producers keen to protect their own markets. By contracting the size of the EU customs union to the UK, the number of special interests pressing for protection is substantially reduced.
Should an FTA then be concluded with the rest of the EU? Of course, FTAs come in different shapes with different trade products covered in different ways.
The main point to note is that Britain has a long-term structural deficit in industrial goods with the rest of the EU of about £20 billion p.a. A fairly negotiated FTA in industrial goods would entrench this surplus which, insofar as it relates to goods which could be obtained more cheaply elsewhere, transfers wealth from UK consumers to EU manufacturers. EU manufacturers would be able to export industrial goods to the UK and get the same prices as UK manufacturers but better prices than countries without an FTA. Of course, Britain would do the same with the rest of the EU but the structural surplus which is in favour of the EU could well increase as EU countries (such as France) maintain their industrial base by protectionism.
No Sense
It therefore makes no sense for Britain to have an FTA with the rest of the EU on withdrawal under any of the scenarios outlined above. We should, however, be mindful that Switzerland has a similar economic profile vis-à-vis the EU as the UK. It has a permanent deficit in its EU trade which reached (visibles) in 2003, 12.5 billion euros, but it has an FTA. Our analysis shows that Switzerland would be economically better off without this FTA. It is impossible to say how much of the EU surplus would disappear if Switzerland opted for unilateral free trade but there is at present a transfer of wealth from Switzerland to the EU under the FTA regime.
The reasons for Switzerland agreeing to an FTA and for British eurosceptics to advocate an FTA for the UK are undoubtedly political. To withdraw from the EU without an FTA is considered in some quarters to be a step too far. An FTA might offer a political "comfort blanket" to that part of the electorate that feels the UK would be "isolated" but it is expensive and not economically justified. The analysis also shows the necessity of deciding what sort of trading regime there would be in post-EU Britain before making decisions about Free Trade Agreements.
The freedoms to which they refer are to the movement of persons, goods, services and capital.
Article 4 of the failed Constitutional Treaty states that: "Free movement of persons, services, goods and capital and freedom of establishment shall be guaranteed within and by the Union in accordance with the Constitution ".
FUNDAMENTAL PRINCIPLE
If you look up the website of the Department for Business Innovation and Skills you will find stated “The free movement of goods, persons, services and capital is a fundamental principle of the European Union.”
Curiously, such claims have almost entirely escaped critical scrutiny, perhaps because freedom is one of those concepts which, like motherhood and apple pie, are difficult to criticise. There have consequently been few who have questioned whether the European Union really does embody these freedoms and to what extent their application is unequivocally a good thing. The other reason that free movement escapes criticism is that it meshes in with the idea of globalization which has many free market enthusiasts who want free movement throughout the world.
SOME PRELIMINARIES
We have a problem with the word ‘free’ in the English language as it encompasses two meanings. Our Italian friends have two words – ‘libero’ and ‘gratituito’. They translate into English as ‘free’ and ‘free of charge’. The same in the other romance languages, such as French, ‘libere’ and ‘gratuit’.
I understand ‘free’ in the English tradition as being ‘absence of restraint’ but also a freeman is a person of responsibility who takes charge of himself and his family, as well as contributes to his local and national community.
‘Free’ education, ‘free’ health services, etc. are, of course, quite different – they fall into the ‘gratuito’ class.
It would have been sensible to take a closer look at what was meant by the ‘four freedoms’, who benefits from them and who pays for them. It is assumed by the three British political parties that no-one could possibly object to them and they never refer to the costs or who pays these.
One other major point has to be mentioned at the beginning. It is measurement. Without correct accounting, one cannot make sense of anything. David Cameron recently said he did not want the Tory party to be flint-faced, turbo-charged accountants’ – well that’s wrong – but what is interesting is how accountants have become declasse. They sit beneath the salt while economists get peerages and Nobel prizes. On a personal note, about 25 years after I left university a contemporary became an Accountant-General in the Department of Education without any financial qualifications. He had been a Secretary to Edward Heath. Yet accounting has a far nobler tradition. After all, we remember Leonardo da Vinci probably the most intelligent man who lived since the time of Christ and he was taught by Fra Luca Pacioli who is famous for his writing the first book on accounting – his Summa Arithmetica.
The supremacy of economists, and I speak as both, over accountants and, frankly, the failure of accountants to engage with government finance (note David Cameron said he would have trained financial directors in all departments) has meant that, despite rigid rules for corporatees and other entities, UK governments have never seen fit to produce I&E and balance sheets either for themselves or for nations. US and Australia, for example, GDP figures are produced monthly but no corresponding balance sheet which makes it quite laughable when commentators refer to us getting richer or poorer from these figures. Extra capital or labour increases GDP but should be reflected in the liabilities side of the national balance sheet. Proper accounting requires proper I&E and balance sheets for the nation and also for the government, separately, but part of the nation. When we had the gold standard this was less important but in a sea of flat money, only the joint production of I&E and balance sheets gives us the knowledge to steer by. Needless to say, GDP per head requires population totals as well (US & Japan).
The two questions I will address today are:
1) Does the EU really uphold the free movement of goods, persons, services and capital?
2) Are these principles good in themselves?
MANAGERIAL PHILOSOPHY
The EU was conceived in more protectionist times as a Customs Union. What is meant by ‘the free movement of goods and services’ in eurospeak is the free movement within the EU, with the Commission determining what may and may not move freely within the EU (the beef bans) and also determining – by means of tariffs, quotas and anti-dumping duties – what can and cannot enter the EU and regulating the prices tariff of agricultural products.
Recent illustrations that the EU departs fundamentally from the principle of free trade include the dispute over the imports of clothing from China and the failure of the EU to meet the goals set at the Doha round because of its determination to preserve the CAP.
Remember the extra prices to consumer brought about by the CAP increases food costs and, therefore, depresses the living standards of the poorest people in the UK. It also disturbs the natural pattern of British trade and produces a permanent deficit in goods trade with the EU, misallocating resources.
If there were a genuine free movement of goods and services Britain would be in the position of being able to purchase the products it needs on world markets at lower prices. Indeed, the concept of regulated free movement of industrial goods within the EU amounts to what Patrick Minford refers to as 'the common manufacturing policy' the objections to which are identical to those which apply to the CAP. But while there is scarcely a single British MP who is prepared to support the CAP the EU policy on manufacturing - which is just as damaging economically - escapes criticism. Prices to consumers are kept up, there is a bureaucracy and, because there is a structural deficit in industrial goods with the EU, buying within the customs union transfers wealth to continental producers.
Meanwhile, another trade-distorting monster - the Financial Services Programme - threatens further limits in the free trade of services – it is a Common Financial Policy, the CAP again.
There is a constant demand from eurosceptics to reconstruct the basis of Britain’s relationship with the EU on the basis of a free trade agreement, often adding the words, “which is what we thought we were voting for in 1975”.
Well a quick read of the YES and NO pamphlets from 1975 will inform you that the YES campaign was quite open that the EU was not a free trade area and the NO campaign specifically called for a free trade area between the UK and the EU, which was voted down.
However, I do think eurosceptics have not paid serious attention to a post-EU Britain. Without using direct quotes, I think it is fair to say eurosceptics want a free trade agreement with the EU.
It should be noted that an FTA is partly a contradiction in terms. While an FTA may allow the two parties free trade in each other's home markets, it also assumes a measure of discrimination against goods purchased from a country not party to the agreement.
The analysis of an FTA's advantages depends on what sort of trading regime an independent Britain chooses to have. To call for an FTA prior to this basic decision is to put the cart before the horse.
What about freedom of movement of capital and persons?
It cannot be said that the EU has been the major engine of change in liberating capital flows. It has gone along with the flow.
As regards freedom of movement of persons, the EU has been highly enthusiastic. Free movement of people brings tears to their eyes. It has widened the original idea of allowing EU natives to work in other EU countries to introduce a whole panoply of ‘rights’ for EU citizens to start businesses, study on the same terms as nationals, commit crimes and still reside in other countries. Moreover, the ‘rights’ have been extended to non-EU immigrants so you have a large Somali community legally resident in Holland suddenly upsticks and move to the UK quite legally. The notorious directive 2004/58/EC gives rights to social assistance and residency.
The EU loves this. Barroso actually said “Sometimes I like to compare the EU as a creation to the organization of an empire.”
The reason is this … The EU believes that EU nationals who work or study in non-native countries are likely to be supportive of the EU political order and, therefore, the more of them the better. Further, a new idea has taken hold among EU policy makers which is that immigrants from outside the EU will become special supporters of the EU as they will have no conflicting national loyalty. A recent poll showed 85 per cent of immigrants to the EU were enthusiastic about the EU. So, Barroso is now proposing issuing blue cards to 20 million workers with the right of ‘circular’ immigration.
Weakening national identity is a core aim of the EU and means the EU has paid a lot of attention to the freedom of movement of people.
Look, all rising political orders have taken an interest in the demographic realities of their day. It is the natural preoccupation of those in power.
Failure to do so is the mark of a polity in decline.
So, to sum up, the EU is in favour of free trade on its own terms, that is, regulates trade within a Customs Union. It is mildly in favour of free movement of capital and it is enthusiastic about the free movement of people.
ARE THESE PRINCIPLES GOOD IN THEMSELVES?
Economists separate movement of goods and services, which are called trade, from the movement of capital and persons, which are the movements of factors of production.
As the NRC pointed out there is a difference in concept ‘an immigrant who comes permanently to the United States competes with natives for every year of his or her working life. Trade is a flow, dependent on exchange rate and trade policies.’ More important, trade has no effect on the accumulated wealth of an economy. An influx of people has an enormous effect, more people sharing the same wealth mixing up trade with factor movements is mixing up stocks and flows.
IS FREE TRADE A GOOD THING?
Well, we are all familiar with Ricardo’s theory, which is quite incontrovertible. It is, howevere, based on the factors of production remaining static. Mutual trade produces benefits.
One could point out that John Stuart Mill examined Ricardo’s theory in his 1844 essay ‘Essay on some unsettled questions of Political Economy’. He found that, while there are benefits, the exact split of the benefits between one country and another depends on the underlying balance of supply and demand and that these can be manipulated by tariffs to take advantage.
Further, Ricardo’s and Mill’s arguments depended on certain qualifications being fulfilled especially the reliance on gold as the balancing mechanism.
It is quite evident in the modern world that the existence of an international capital pool based on flat money muffles the effects of trade flows. Unlike the automatic stabilization inherent in simple gold based currencies, the existence of this pool of flat money can mask underlying trends so ultimate adjustments can be severe. Indeed, the adjustment may be so severe that all the previous benefit is cancelled out.
In general, I am a free trader when factors remained fixed but I recognize Mill’s and, recently, Paul Samuelson’s qualifications and recognize that flat capital pools create dangers. Like poor accounting, they distort reality.
FREE MOVEMENT OF CAPITAL
In the modern world what is often confused with or mixed up with free trade is the free movement of the factors of production, capital and persons. We will leave out entrepreneurs and the question of land and natural resources which cannot move.
One justification for capitalism is that increased capital supply provides a greater demand for labour and, therefore, higher wages. Reduction in capital supply reduces demand for labour and, therefore, wages.
One problem, it is possible to argue that capital does not move unless the owners of capital have moved - actually emigrate. After all, the capital owner expects to get this capital back plus an extra return, so capital movement by those not intending to emigrate is not real capital movement as they expect a) stream of income, b) return of capital.
So let us be clear. Where we talk about the movement of capital, we are conflicting two phenomenon. One is emigration of persons with their capital – in simple terms, their equipment, as the USA or Australia – the other is loans abroad by persons who want an income stream and return of capital but do not move themselves.
Proponents of allowing capital outflows state that even if reduction in capital supply reduces home labour wages that is still best because a) it cannot be prevented, b) if capital could not flow abroad, savings would be reduced.
These are very good and, indeed, in their way incontrovertible arguments. If a country is uncompetitive, it is better that the capital of that country should continue to increase and earn returns overseas.
What I want to draw attention to is that some movements of capital have different effects to others and, therefore, as regards the country from which capital is removed there is a ranking structure in possible gains or losses. Please look at the table I have prepared and you can see that certain capital movements have different results than others.
My point is this. If we can rank the benefits and disbenefits of capital movement surely we can say that certain capital movements are more beneficial than others.
The decisions about capital movements are taken by capital owners. Consumers and labour are passive. There are further complications. Capitalists will try to socialize losses and privatize profits. Lobbying and wars may benefit British capitalists but impose a tax on the rest of society. BP Mittal.
FREE MOVEMENT OF PERSONS
The EU idea was originally to allow workers to seek work in any EU country. Later we had ‘freedom of establishment’, claims on social services, third country nationals allowed to circulate, human rights’ enforcements, etc.
So, when discussing free movement of labour within the EU we are discussing the economics of immigration which is a transfer of stock. A receiving country within the EU has two shocks. First an increase in labour supply and, second, an increase in the number of persons trying to use a country’s accumulated wealth. This includes students, pensioners and welfare cases.
There is a complete difference between that and trade, stock and flow.
BENCHMARK
The fundamental benchmark is that of the NRC, ‘If immigrants have exactly the same skill distribution as domestic workers and if they have brought sufficient capital with them to maintain the US capital/labour ratio, then natives will neither benefit nor lose from immigration.’
The amount of capital per worker is £150,000. If they do not have this there is crowding in, diverting natives’ capital to supporting immigrants. A big total.
The effect on GDP is a tiny benefit but has severe distribution effects on poorer competing labour.
The question is, ‘How does the immigrant accumulate his share of the pre-existing capital and wealth built up over generations and centuries.’ On the face of it, adding immigrants without capital must reduce capital and wealth per head.
FISCAL EFFECTS
Borjas says ‘The welfare state is specifically designed to transfer resources from higher income to lower income persons. It is downright ridiculous to claim that low skill immigrants somehow end up being net contributors to the public treasury.’
or
Milton Freedman ‘It’s just obvious ……. You cannot have free immigration and a welfare state.’
OTHER COSTS
Remittances
Cultural costs
Opportunity costs such as lower education for natives.
Many free market economists equate free immigration with free trade. They like globalization as well but at least globalization does not reduce the wealth of lower income people even if it reduces their wages.
To consider the standard of living of a country’s inhabitants we must not only take account of the income and expenditure account or GDP but also the wealth or balance sheet. Standard of living does not only depend on GDP, it also depends on accumulated wealth, which is not reflected in GDP except for marginal additions. One can conclude that the free movement of persons is a massive cost to countries receiving immigrant workers or students.
To sum up the economic effect of freedom of movement, if you import an immigrant family with two workers on average British wages, you are effectively writing a cheque on the British taxpayer for £315,000 to provide the capital they need. If they go on social assistance, the cost soars. If there are cultural costs, it goes higher still.
The UK specifically suffers because, as the BBC reported in 2008, ‘But many … Tamils and Ghanaians in Milton Keynes said getting their children educated in English was a key factor in deciding to migrate a second time’. Frattini’s proposals for ‘circular migration’ will intensify this movement.
WHO IS AFFECTED?
Economic theory predicts the greatest impact of the EU, globalization and immigration will be on those on lower incomes. Elites are insulated, rely on mastery of native culture and like cheap labour. As Caldwell says they keep talking about restaurants.
Professor Borjas explains why blacks and previous immigrants suffer most from the new wave of mass immigration. ‘It turns out that African-Americans are likely to lose from immigration for two different reasons. First, it is employers who receive the bulk of the benefits from immigration (Blacks own about three per cent of the capital stock of the US while proportionately they are rather over ten per cent of the US population). Because blacks and immigrants are relatively more similar than whites and immigrants (in economic characteristics) any adverse impact of immigration on competing workers will fall hardest on the population of native-born African-Americans.’
WHY DO POLITICIANS LIKE IT?
Politicians gain power in a diverse society. There are simply more problems and more complications. The multiplication of welfare activities by the government and the increasing layers of government and regulation by the EU places an increased premium on the activities of those who are in the control seat – the politicians – as well as , of course, providing comfortable and well paid jobs. Incidentally, this is a reason often put forward in Switzerland for not joining the EU – it would add to the power of the government in Switzerland itself. All these issues increase the role of government on society and the economy and make voters dependent on government programmes and the political class which guarantees these programmes.
As Caldwell says in his book, Reflections on the Revolution in Europe, ‘If Europe is getting more immigrants than its voters want, this is a good indicator that its democracy is not functioning. European leaders have chosen to believe something different; that its immigration and asylum policies involve the sort of non-negotiable moral qualities that you don’t vote on.’
Going back to the distinction between ‘libero’ and ‘gratuito’, there is undoubtedly a ‘gratuity’ both for immigrants who move without capital and also for politicians who accumulate more power and parade their morality. But the ‘gratuity’ has to be paid, by the poorest members of the receiving country.
APPENDIX
Broadly, Britain would have three choices.
First, it could declare for unilateral free trade, as favoured by Patrick Minford. Second, it could retain the tariffs and protective trade regime of the EU as presently constituted, with the regime administered by Whitehall and the proceeds of tariffs going to the UK Treasury instead of Brussels. Third, it could introduce a modified controlled trade regime with fewer restrictions than presently organized by Brussels but administered by Whitehall.
Minford points out the benefits for the UK of declaring unilateral free trade.
These are that the UK would now buy all its goods at world prices.
Not only would EU manufacturers, who sell far more industrial goods to Britain than vice versa (a net deficit of £20 billion p.a. for the UK), be forced to compete with manufacturers outside the EU, which would reduce prices, but also the hidden price rises through actual and threatened anti-dumping and other restrictive mechanisms of the EU, which do not necessarily show up in the trade figures, would be got rid of. In other words, declaring free trade in industrial goods would be similar in its effects to leaving the CAP.
The second advantage is the general economic point that free trade corrects misallocation of resources in the UK, a basic point in economic theory.
Preferential Access
Minford concludes that if Britain declared unilateral free trade there would then be no possibility of an FTA. Why? "This is to miss the point of a customs union in which there is horse-trading between the producers of different countries paid for by the consumers; if a country refuses to trade by penalizing its consumers, it has nothing to offer". He adds, "Were the UK to be outside and let its consumers receive world prices,continental EU countries would be mad to let UK producers have access to their markets at preferential customs union prices; this would amount to asking their own producers to transfer 'profits to UK firms with no quid pro quo".
So if it is impossible to have an FTA in the event of Britain declaring unilateral free trade, what is the relevance of an FTA under the other scenarios?
The Other Scenarios
The two other scenarios are that Britain retains the Brussels' industrial goods regime either wholly or partly under pressure from commercial interests. It should be noted that if Britain administered its own trade regime from Whitehall it would make three undoubted gains. First, all duties would accrue to Britain not Brussels. Second, it could eliminate dumping and even more the threat of dumping rules, voluntary restraints and all the rest of the Brussels panoply which push up prices. These are the equivalent of the effects of the CAP in pushing up costs to the consumer when buying food. The third effect is more subtle. Basically, the wider the area of a customs union the larger number of producers and special interests which are created, all of whom press for antidumping duties, tariffs and trade restrictions. At present UK consumers may pay higher prices for goods in which there is little or no UK production because we are in a customs union with EU countries that do have producers keen to protect their own markets. By contracting the size of the EU customs union to the UK, the number of special interests pressing for protection is substantially reduced.
Should an FTA then be concluded with the rest of the EU? Of course, FTAs come in different shapes with different trade products covered in different ways.
The main point to note is that Britain has a long-term structural deficit in industrial goods with the rest of the EU of about £20 billion p.a. A fairly negotiated FTA in industrial goods would entrench this surplus which, insofar as it relates to goods which could be obtained more cheaply elsewhere, transfers wealth from UK consumers to EU manufacturers. EU manufacturers would be able to export industrial goods to the UK and get the same prices as UK manufacturers but better prices than countries without an FTA. Of course, Britain would do the same with the rest of the EU but the structural surplus which is in favour of the EU could well increase as EU countries (such as France) maintain their industrial base by protectionism.
No Sense
It therefore makes no sense for Britain to have an FTA with the rest of the EU on withdrawal under any of the scenarios outlined above. We should, however, be mindful that Switzerland has a similar economic profile vis-à-vis the EU as the UK. It has a permanent deficit in its EU trade which reached (visibles) in 2003, 12.5 billion euros, but it has an FTA. Our analysis shows that Switzerland would be economically better off without this FTA. It is impossible to say how much of the EU surplus would disappear if Switzerland opted for unilateral free trade but there is at present a transfer of wealth from Switzerland to the EU under the FTA regime.
The reasons for Switzerland agreeing to an FTA and for British eurosceptics to advocate an FTA for the UK are undoubtedly political. To withdraw from the EU without an FTA is considered in some quarters to be a step too far. An FTA might offer a political "comfort blanket" to that part of the electorate that feels the UK would be "isolated" but it is expensive and not economically justified. The analysis also shows the necessity of deciding what sort of trading regime there would be in post-EU Britain before making decisions about Free Trade Agreements.