Saturday, 3 November 2018

Frictionless trade is not the same as free trade


Many people, including politicians and journalists, don’t understand the difference between ‘free trade’ and ‘frictionless trade’.

This has caused a huge misunderstanding across the country, leading to the mess we are now in.
In summary, ‘free trade’ means that goods (sometimes only some goods) can be exported and imported between countries without tariffs – hence the phrase, ‘free trade’ or ‘tariff free’.
But those goods, even though tariff free, still have to go through customs and are subject to checks, often causing many delays.
And even though it’s called ‘free trade’ there are other barriers as well as customs – such as regulations, restrictions, strict compliances and complicated documentation, which hold things up. (See the graphic for some examples).
So, for example, a Canada-style trade agreement between the UK and the EU – so coveted by ardent Brexiters – could give us tariff-free trade, but it wouldn’t give us frictionless trade with the EU, which is vital to so many of our manufacturers.
(BMW UK imports around 90% of its parts from the EU to enable it to manufacture the Mini in the UK. If we no longer have frictionless trade with the EU, says BMW, it would destroy their just-in-time manufacturing process, meaning they would be ‘forced’ to move their Mini factory to Holland).
‘Frictionless trade’ means that goods, as well as being tariff free, go through customs without any checks. In fact, it means that for trade between those countries, there aren’t any customs or borders. 
Furthermore, with ‘frictionless trade’ there is a ‘level playing field’ between countries for the movement of goods – removing many of the barriers that exist with ‘free trade’ only.
That makes exports and imports between those countries super-efficient, leading to streamlined delivery of products, and of course, increased profits and more successful national economies.
But frictionless, although making international trade simpler and more easy, is more difficult to establish than just free trade. It means that countries have to enter what is known as a ‘customs union’ to enable borderless trade to take place between them.
Countries in a customs union agree a common external tariff for imports from non-member countries. The tariff revenue may then be shared between members, with the possibility that the country that collects the duty retaining a share (between 20 and 25% in the European customs union) to cover the additional administration costs associated with border trade.
A ‘customs union’ cannot just be based on trust. If countries agree to flatten their borders, then those countries need to agree rules, terms and conditions. And they need to agree on a mutually acceptable court to intervene if those rules are breached.
That’s so the process of sending goods between each other is not abused, for example, to export substandard or dangerous goods, or exporting goods that are banned, to another country in the customs union.
Agreeing those rules is fiendishly complicated, which is why it can take many years, sometimes decades, before countries can agree on the strict and comprehensive terms and conditions to enable them to open-up their borders to other countries for the purposes of trade.
But there’s more. For frictionless trade to function most fully and most successfully, it needs what are called the ‘four freedoms’ – free movement of goods, services, capital and people.
These ‘four freedoms’ represent the cornerstones of the EU’s Single Market, helping the EU to become the world’s largest and most successful trading bloc.
Although it would be technically possible to implement just some and not all the ‘four freedoms’, the success of the EU has been to conjoin all these freedoms into a single market, so that they work seamlessly together.
Studies show that the EU’s gross domestic product (GDP) has grown by several percentage points thanks to the Single Market and its four freedoms. This is hardly surprising, when one considers that two-thirds of all goods produced in the EU are exported to another EU country.

▪ The UK couldn't function without the 4 freedoms

To try and understand how the EU couldn’t fully function without all four freedoms, imagine how our own union of the United Kingdom also couldn’t fully function without these four freedoms.
The UK currently benefits from two single markets. Our country’s single market. And our continent’s single market. They both operate in the same way and on the same principles.
Free movement of people, goods, services and capital between the three countries of England, Scotland, Wales and the province of Northern Ireland form the basis of our union of the United Kingdom.
It’s our single market. Just like the EU’s Single Market, it’s the glue that keeps us together.
Enabling people, goods, services and money to move without borders or restrictions across England, Scotland, Wales and Northern Ireland is what makes us a functioning unity. It’s helped to make the UK one of the world’s richest and most successful countries, with common standards, values and history.
Free movement of people, goods, services and capital work together. They cannot be separated without causing discord and disorder across our nation.
Mess with just one of the four freedoms and our union of the UK would come undone. Not only business and employment would be affected, but peace and stability would be put at risk if we could not have the freedom to move, to do business, to trade, to send money and to work, without friction, across and between our four member ‘states’ of the UK.
It’s the same with the EU. The EU functions as a cohesive single market of 28 countries, just as the UK functions as a cohesive single market of four ‘countries’.
The EU Single Market is the glue that keeps European nations together. It has helped to make Europe the richest and most successful continent on the planet, with common standards, values and history.
The UK’s Single Market, and the EU’s Single Market, both represent significant achievements. They work.
But here’s one vital difference.
Frictionless trade between the four members of the UK is vital to our smooth functioning as a nation. But doing business with each other doesn’t make the UK significantly richer.
To do that, we need the UK to export our goods and services (and we export far more services than goods).
Doing frictionless trade with other EU countries makes Britain richer. Easy exports and imports with the EU bring us prosperity.
If we lose borderless, lowest-cost trade with our most important customers and suppliers right on our doorstop, Britain – and Britons – will be poorer.
Our frictionless exports to the rest of Europe bring us wealth. Yes, exports to countries outside the EU also bring us wealth.

But we need BOTH. And ONLY in the EU do we have both.

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Other articles by Jon Danzig:
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