What is ‘free trade’?

Professor Stephen Weatherill, Somerville College Oxford University

On 3 January 2017 Sir Ivan Rogers resigned as the UK’s Permanent Representative to the EU. He wrote a widely publicised letter of resignation. Among several incendiary observations directed at the government’s perceived unpreparedness for negotiations on Brexit perhaps the most headline-grabbing was:

‘Contrary to the beliefs of some, free trade does not just happen when it is not thwarted by authorities: increasing market access to other markets and consumer choice in our own, depends on the deals, multilateral, plurilateral and bilateral that we strike, and the terms that we agree’.

The use of a double negative in the opening salvo is a little clumsy, but the gist is clear. Removing obstacles created by authorities does not automatically release free trade. More is needed. Dealmaking is needed. And this, Sir Ivan stings, is contrary to the beliefs of some. Who are these ‘some’?

David Davis and Boris Johnson, possibly. Liam Fox, probably.

The International Trade Secretary delivered a speech in Manchester on 29 September 2016 in which, having begun with reference to Adam Smith’s The Wealth of Nations (1776), he expressed a desire to ‘remake the intellectual and philosophical case for free trade’. The speech is peppered with praise for free trade. But Fox never defines what he means by free trade. His speech to the Conservative Party Conference in Birmingham a week later is equally barren. The closest he comes to definitional precision in the speech delivered in Manchester is to observe, citing Adam Smith for the claim that ‘it is a moral right for people to buy whatever they want from those who sell it to them the cheapest’, that the idea that ‘governments should restrict the right of individuals to exchange their hard work for goods and services at an agreed price in an open market is one of the gravest infringements of personal liberty I can think of’. And he drew on the repeal of the Corn laws during Victorian times as a demonstration of the virtuous release of price competition to the benefit of consumers.

Fox’s vision demands that the State keep out of private transactions. The free trade which he wishes to champion is in truth unregulated trade.

But free trade in this form does not exist. Governments intervene in markets for myriad reasons and in myriad ways, and they have been doing so for a very long time. In England the composition of ale and bread has been the subject of regulation for centuries. Consumers cannot know for sure that the products on offer in the marketplace are wholesome, so the State intervenes. These are the earliest forms of modern consumer protection law, and they reflect an understanding that leaving the market unregulated will cause it to malfunction where the consumer does not possess adequate information to distinguish between products according to their quality. Ale and bread then – videogames and i-phones today, which come with statutory guarantees of quality. In similar vein the nature of the relationship between employer and employee is not simply a matter of private negotiation: State regulation supplies a floor of protection according to an assumption that, without it, the employee is vulnerable to exploitation or unfair treatment. The relationship between a landlord and a tenant is regulated for similar reasons. Markets may also malfunction on the supply-side. Competition law, in its common law form of restraint of trade and more recently in statutory guise, places restraints on the conduct of traders because of fear that a market left unregulated may become contaminated by anti-competitive agreements or the abuse of monopoly power. As Adam Smith himself remarked in The Wealth of Nations, ‘People of the same trade seldom meet together even for merriment and diversion, but the conversation ends in a conspiracy against the public, or in some contrivance to raise prices’.

Markets are neither free-standing nor inevitably self-correcting. Sometimes they require protection. So markets are and long have been built on the correcting influence of public regulation. Of course one might argue for less or for more public regulation of the market, but to speak of ‘free trade’ in a market as if it operates with no public regulation is deeply misleading and lacks historical context. For every perniciously protectionist rule such as the Corn laws there are hundreds of virtuous measures of consumer, worker or environmental protection which reflect the limits of the capacity of unregulated markets to address the pressing social concerns of the time.

This readily translates to the transnational plane. ‘Free trade’ across State borders cannot possibly entail a process of private traders arriving in foreign lands and striking deals with local buyers without regard for local laws. Those traders will be required to comply with the local rules that govern the operation of markets – rules of consumer protection, environmental protection, competition law and so on. And those rules will doubtless be different from those that apply at home: cultural specificity and historical accident dictate that regulatory diversity between States is the norm. These are non-tariff barriers to trade. They mean that trade is not ‘free’.

There are plenty of ways for States to get together in order to address such impediments to cross-border trade. In the abstract there are two extremes. One is to decide that regulatory diversity should be ignored: a product or service that is good enough for one market should be treated as good enough for another. The other is to replace that regulatory diversity by introducing rules which apply in common.  The first model directs that States may not exclude products and services even if they fall below their own locally determined preferences. This therefore involves States relinquishing regulatory authority, and in effect placing their market under the jurisdiction of a more lenient regulator in another State. This raises obviously sensitive issues associated with accountability and control. The second model requires the creation of a common rule-making body. Here too States relinquish regulatory authority, but to a new supra-State authority charged with the responsibility to select the applicable rule. Here too loom – different – issues associated with accountability and control. But neither model suggests unregulated trade. Quite the contrary. Public regulation of one kind or another is necessary to promote an integrated trading space that spans jurisdictions which are marked by varying patterns of intervention in the market.

In practice models of economic integration that fall within the two extremes are found. States sometimes accept that national measures that impede trade shall be subject to some form of review: they are typically not automatically set aside but nor, in the cause of economic integration, are they jealously guarded as inviolable expressions of local autonomy. In this vein the rules of the WTO assert that national measures that obstruct cross-border trade may be subject to review. The detail need not detain us: the point of present relevance is that there is no question of cross-border trade proceeding between private parties without reference to public regulation. The material scope of the WTO regime is limited and in any event there is room to justify national measures of regulation even where they do impede inter-State trade, for example for reasons associated with the protection of public health. 

This is remote from Dr Fox’s superficial model of ‘free trade’. Free trade agreements are recognised under WTO law and they represent a deeper commitment to realising the productive energy of cross-border trade. There are myriad versions but the free trade envisaged is not unregulated trade. Free Trade Agreements aim to achieve a freeing of trade, but they do not envisage a wholesale ejection of public regulation from the market. The case of the EU is more complex again. In the EU the extent to which control is exercised over State regulatory autonomy in so far as it obstructs inter-State trade goes still deeper than that exercised through the WTO – this is the entrancing story of Cassis de Dijon laced by ambiguities such as Keck. This is the promotion of deregulated trade within the EU but, given the vital space permitted to States to justify national measures which obstruct inter-State trade on grounds of health protection and the public interest more generally, it is certainly not a charter for unregulated trade. Moreover, the EU possesses important legislative competences which supplement the free movement rules as a means to open up the internal market. This covers legislative harmonisation supported by sector-specific rule-making activity in areas such as social policy and environmental protection. This programme of common rulemaking is designed to free trade – but not to leave it unregulated. In fact the EU, when it legislates, acts to regulate trade, according to common patterns: better, the EU re-regulates trade, in replacement for pre-existing and diverse State regulation. EU law promotes cross-border private contracting within the internal market but not on terms that exclude public regulation.

To return to Sir Ivan Rogers– ‘free trade does not just happen’. In the transnational sphere, there is no free trade, there is only freed trade and it is regulated trade. The extent to which it is freed and the terms according to which it is regulated depends on the deals struck and the enforcement mechanisms created in their support. It requires transnational negotiation, design of rules and of institutions. It – again to return to Sir Ivan – ‘depends on the deals, multilateral, plurilateral and bilateral that we strike, and the terms that we agree’. The people of the UK have voted to quit the EU and that will lead also to the UK falling out of the scope of the EU’s several dozen free trade agreements with third countries. That will not grant the UK free trade. It will diminish the UK’s enjoyment of freed trade. And it will demand that the UK does a great deal of dealmaking even to begin to replace what it has lost. In Victorian times, to which Dr Fox pays much wistful attention in his Manchester speech, the UK’s economic and political strength allowed it to swagger its way to oceans of beneficial trading activity. The balances of power are different today. It is not conceivable that post-Brexit the UK will get anything other than a worse deal with the EU-27 than it enjoys currently, given that the percentage of total export trade which the UK does with the EU-27 is so many times higher than that which the EU-27 does with the UK. The UK needs the EU a great deal more than the EU needs the UK. And equally it is not conceivable that post-Brexit the UK will get anything other than a worse deal than it enjoys currently with trading partners elsewhere in the world, given that the UK, population 64 million, has so much less clout and so much less to offer than the EU-27, population 440 million.

Trade today cannot be effectively promoted by unilateral action. Dealmaking is required. And that requires concessions. As the House of Lords European Union Committee felicitously put it in its December 2016 report on Brexit: the Options for Trade, ‘there is always an inherent trade-off between liberalising trade and the exercise of sovereignty’ (page 3). It adds that as a general rule ‘the deeper trade relationship, the greater the loss of sovereignty’ (page 76). I would treat ‘sovereignty’ with as much suspicion as I treat ‘free trade’: as a label, it is at best unhelpfully imprecise, at worst an anachronism. Better to frame the discussion in terms of power in practice as distinct from power in principle. In the current conditions of interdependence among States in Europe the State that insists on exercising its power unilaterally may pride itself on its adherence to principle but it will find that in practice its ability to address problems that spill over borders – climate change, migration, trade, and so on – is seriously diminished. It needs to co-operate with other States to find solutions. That co-operation extends its power in practice. All States gain from agreeing to be locked into a mutually agreed framework for addressing problems: each gives up a degree of autonomy in principle but in return knows that all other participants have made precisely the same concession.

Voting rules are vividly emblematic of the trade-offs at stake. A rule of unanimity preserves a veto but it is one that is held by all members of the bloc, so that difficult decisions are unlikely to be taken: this is to privilege ‘sovereignty’ in principle over the facilitation of practical dealmaking. Embrace of majority voting acquiesces in the possibility of being outvoted in return for a power also to outvote: deals will be struck more readily, though on occasion under sufferance. Voting rules are one of the design choices that have to be made by co-operating States. So engaging in multilateral trade deals typically involves some degree of self-restraint measured in commitments to comply with binding norms located at the transnational level – promises not to obstruct trade (typically except in defined circumstances), promises to apply rules agreed in common. This is to yield power (to act unilaterally) in principle yet it enhances power in practice. ‘Free trade’ is really about regulated trade – negotiating the terms of ‘free trade’ is really about negotiating the patterns of regulation that will provide the foundation for trade.

This is ‘free trade’ in a modern world of densely regulated markets and unavoidably interdependent States. It is an agenda of multilateralism. To suppose that free trade simply happens when governments get out of the way is an exercise in evading complexity.

Seen from the outside one has the increasing impression that those who drove the people of the UK to vote for Brexit and who are now in charge of plotting the future do not even understand the first thing about what ‘free trade’ means today, in the EU or more generally. Sir Ivan’s comments suggest that that is what it looks like from the inside too.

Barnard & Peers, European Union Law: chapter 27, chapter 11

Photo: Adam Smith

Photo credit: Adam Smith Institute, www.adamsmith.org