Happy 10th Anniversary, EU Central Bank: The Only True Free Trade Agreement

Jun 10th, 2008 | By | Category: Economics

Happy tenth birthday, European Central Bank! My, how you’ve grown. Why? Because it’s hard to be a little bit pregnant. The EU represents the only true free trade agreement between nations today.

Grab any responsible economist, and they’ll admit to you that free trade requires radical changes between countries. Ahem, in short, to get the theoretical benefits of free trade, nations must:

1. Drop any tariffs, quotas or other special taxes on imported goods and services.
2. Drop any market-distorting practices, like selective subsidies, taxes, regulations or other policies that favor domestic or foreign products or services.
3. Provide free access to accurate information about the markets involved.
4. Allow money and other forms of capitol to flow unrestricted between countries, without currency manipulation or restrictions.
5. Labor must also be able to travel freely within the free-trade region.

By this definition–the definition economists use when discussing free trade, and assume is true when predicting the benefits of free trade–neither the WTO nor NAFTA represent anything approaching free trade. The EU and the European Central Bank fulfill all of these requirements, and thus represent the most aggressively radical application of free trade since the ratification of the US Constitution.

Completeness matters. By having a unified regulatory structure, one EU member nation cannot artificially outcompete another by dropping environmental, labor or safety protections. By sharing the same information gathering structures, no EU nation can falsify economic growth, or hide flaws, more than any other. By sharing a currency, governments cannot manipulate exchange rates, and thus entire balances of trade. Most radically, as a EU citizen, if you cannot find work in your home country, you are free to move to another. If you are the best at a give job, and it just happens to be across a national border in the EU, you can still take the job. No visa. No immigration. Just hop on a train and go. It isn’t perfect, the differing healthcare systems between European countries cause some grief, but it’s pretty damn impressive.

Compare this to NAFTA. Canada, the US and Mexico have radically different regulatory bodies and standards. All three have distinct currencies, subject to manipulation and speculation. The whole republican primary was grief about “illegal” transfer of labor from one part of this free trade zone to another. Likewise, our trade agreements with China all but encourage currency manipulation and advantage-taking of differences in regulation.

When a trade agreement fulfills the five requirements above, you end up selecting for the most efficient, the most effective and the most successful corporations and individuals. You tend to draw people to regions of economic success and away from those of failure. The economies of the participating nations become better and doing what they do, with the same or less input resources. A good.

When you aggressively pursue only some of the five, you end up selecting for those best at manipulating the remaining. Fail to unify regulations? You select for corporations the best at corrupting the local laws and enforcement to their advantage. Fail to unify currencies? You select for those best at manipulating the currency trading to their advantage. Fail to drop migration restrictions on people and you select for the companies that are the most willing to flaunt the immigration laws. The outcome is far from efficient, and the meritorious are unlikely to succeed. The ruthless win.

Many of the trade deals we’ve agreed to over the past few decades are anything but free trade. They have much more in common with the crafted and manipulated trade deals of the 19th Century European empires, designed to draw wealth to the already wealthy, to hold down the power of labor and environmentalists, to consolidate power and destroy free markets. The jackals who wrote these trade deals to their advantage, and the disadvantage of the vast majority worldwide, have much to fear from real free trade.

In a delightful way, the very existence of the EU as a real free trade agreement provides a dose of reality, a living and breathing example of how our own situation could be better.