Lowest Common Denominator

(Posted: Wednesday 18th July, 2018)

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From an economic perspective, the best trade policy a nation can take (even when only considering its own interest and not wider global benefits) is one of unilateral free trade — to abolish its own tariffs (and bounties, though those are much rarer) whether or not other nations reciprocate. But today some of the greatest obstructions to trade come from what are called 'non-tariff barriers' — regulations on product standards, units of measure, food additives and labelling, appellation… often an endless thicket of rules for which compliance by foreign producers is prohibitively expensive (not that these do not also place significant costs on domestic producers). How, then, can barriers of this kind be reduced by a policy of similar simplicity?

In the world of reciprocal international agreements, of course, there is GATT/WTO, whose 'Most Favoured Nation' rules apply to non-tariff barriers just as they do to tariffs — that whatever standards a nation applies to one trading partner, it must apply to all. But this is not in itself a sufficient solution: the regulations may still be complex and expensive, so long as they are enforced on everyone — and 'national treatment' is a possibility before the goods enter the domestic market. We must look elsewhere for a true analogue of unilateral free trade.

The model I propose here is a simple one. First, choose a list of nations (and/or customs unions, in some cases) whom one trusts to maintain adequate and equivalent standards. In the UK's case, this might be (say) the US, the EU, Canada, Australia and New Zealand. Then, pass legislation declaring that, for a product or service to be fit for sale in the UK, it suffices for that product or service to satisfy either the UK's own regulations or the regulations of any one of those other nations. Thus, if (for example) you can prove that your butter has been signed off as edible by the Australian government's food regulator, that alone is enough to allow you to sell it in the UK, without having to deal with the Food Standards Agency at all.

This "lowest common denominator" model (I am still on the look-out for a better name, as some will doubtless use the current name as a pejorative) has several advantages. Most obviously, it ensures that the 'recognised nations' can frictionlessly export to us, lowering prices for the consumer. It also makes it easier to run a business producing at least in part for export to any of those nations, as the export-standard goods (being, naturally, conformant to the foreign market's standards) are also fit for domestic sale, somewhat buffering the producer against variations in foreign demand. But the advantages do not apply only to trade with the 'recognised nations', as there will be many producers in other nations who manufacture products for export to the recognised nations, which (of course) follow those nations' standards. Those products are then also automatically suitable for import (not necessarily travelling via the relevant recognised nation; it is only the certification of the standards that must come from there). For instance, many industries in Latin America and even China produce goods for sale into the US market; these could all be allowed into the UK with no friction.

A subtler advantage is that this exerts a simplifying pressure on UK regulations. Burdensome regulations will only be effective if shared by all the recognised nations, so in many cases the ultimate control of product standards will be back with the consumer — where it belongs. This also limits the ability of large and powerful corporations to capture the regulators and obtain regulatory regimes that protect them from smaller, more innovative competitors (which is arguably the main reason why there are as many gigantic multinational corporations today as there are). A similar effect on services will help to prevent the government-sanctioned cartels known as occupational licensing laws.

Furthermore, just as with tariff abolition, while the benefits of a unilateral freeing of trade are great, if other countries follow suit the gains can be even greater. For a mutual recognition of standards makes cross-border trade frictionless in both directions, thus expanding the size of the market, deepening the division of labour (and supporting specialisation of capital) and thus increasing all-round productivity. It's basically a free-market economist's dream scenario.

Will any of this happen? Probably not; governments today don't even have the sense to abolish their tariffs (public choice theory explains the forces that motivate this national self-harm), and when they pursue international trade agreements, too often (as with the UK's Brexit negotiations) they choose regulatory harmonisation over equivalence (i.e. mutual recognition). There are some credible political voices calling for the latter approach (indeed DExEU's original White Paper proposed a mutual-recognition deal with the EU), but there doesn't seem to be much appetite for unilateral measures of the kind I have described. Then again, in times past, the task before the Anti-Corn Law League must have seemed insurmountable; it is well to at least hope, even if one cannot expect or believe, that politicians may eventually make the right decision.

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