The political economy of trade & subsidiarity

Tim Worstall wants us to believe that the EU makes worse decisions on trade policy because the decision-makers are too far from the people:

it’s a fairly basic theory of mine about how the world works that the further away from the people any bureaucracy is the worse it does. Some twit trying to impose silly rules via the parish council quickly gets reminded, in the most personal and upfront manner, of quite how silly those rules are. Local councils are similarly amenable to personal pressure….derision down the pub for example. As bureaucracies become further and further away, regional, national, continental (and in the uber example, global,) there is less and less of this correction.

I am generally in favour of the principle of subsidiarity (which is that decisions should be made at the lowest possible level) but I don’t think that the problem with trade policy decisions is that they are made by people who are insufficiently politically accountable.

The political economy of trade policy is that trade restrictions (such as tariffs and quotas) are of large and transparent value to a small number of producers, who are typically well organised and vocal. There are many more losers – namely, the consumers who pay the costs of protectionism – but though the loss is large in total, the cost to each consumer is small, and disguised in the form of higher prices.

Politicians who represent farming constituencies are generally vigorous supporters of agricultural subsidies and protectionist quotas on agicultural imports. Politicians in industrial constituencies usually advocate tariffs on imports that compete with their voters’ factories. Politicians that represent the consumers who lose out from these measures tend to give much less priority to trade issues, as their voters are relatively apathetic.

So the political force for protection is stronger than the force for liberalisation, and governments continue to implement trade barriers, even though it would be in the interest of their citizens overall to remove the tariffs and quotas.

The "democratic deficit" in this case is not that the decision-makers are too far from the people; it is that there is an asymmetry between the political pressure from the beneficiaries of trade restrictions and the political pressure from the losers.   

Paradoxically, this may be a case where taking the decisions further from the political representatives of those most directly affected would be beneficial.  There is a parallel with the case for creating an independent central bank (which I guess Tim would be in favour of) – there may be benefits from consciously putting these decisions in the hands of people who are somewhat removed from the political fray and who can be given incentives to pursue the broader public good, rather than having to respond to the more immediate and vocal complaints of the losers. Tim may want to believe that politicians who are more directly accountable to their voters would take better decisions; on this issue, I fear the opposite is true.

Even if Tim were right and there was reason to think we would get better trade policy decisions at lower levels of government, it is impractical.  All but the most extreme Eurosceptics support the EU single market.  And that in turn requires that there are no tariffs and quotas between European countries, and a common external tariff.  To devolve trade policy decisions back to national governments would add a significant burden on Europe’s businesses.

3 thoughts on “The political economy of trade & subsidiarity”

  1. I agree I am rather extreme…in that as these are decisions that should be taken at the lowest level, that of the individual, we should therefore rule out the ability of any of the higher levels to legislate upon it. Thus the Single Market is fine because all of the legislation is to prevent national govts from protecting or distorting a market. But the common external tariff has to go.
    You’re right, of course, that if there is going to be legislation limiting the individual’s rights to purchase what they will, then a disinterested (ie not the local MP relaint upon the textile workers votes) bureaucracy would be a good solution. But better would be to not have any such restrictions at all.

    Owen replies: But that is just a tautology, isn’t it? If we had completely free trade (which is what I too would prefer) then it wouldn’t matter where the decisions were taken, as there wouldn’t be any decisions to take. But since we don’t, and so we need a set of politicians to take decisions to reform (and, I hope, liberalise) trade policies, which politicians should they be? Answer: probably not the ones closest to the textile workers. Which takes us full circle: the problem here is protectionism, not the EU.

  2. My two pennies’ worth – my guess is that Tim’s view (like mine) is coloured by the British experience. For a variety of reasons, sectional trade interests aren’t as powerful here and so Britain would be more likely to end up with freer trade if we had subsidiarity; but I’d guess that for most countries (ahem, France), Owen’s view would probably be closer the truth.

    Owen adds: Thanks Blimpish. You may be right. But I have a suspicion that sectional trade interests are less vocal here in part because the EU has exclusive competence (in the jargon) on trade policy. This enables the UK Government to take an avowedly free-market, pro-development line on trade policy, safe in the knowledge that it will not make the slightest difference because the Commission negotiates on trade, not member states. When there is something to fight over within the EU – eg CAP reform – you’ll find the UK Government working hard to ensure that our producers have their snout in the trough with everybody else. So I suspect that if we had much control of trade policy at national level, it would be a much more controversial topic here than it is today.

  3. The other problem with trade policy is that ultimately, as your political assessment makes clear, it would be impossible for everyone to actually agree on trade system that was totally free. In which it is not clear at all whether the population in aggregate in an economy is better off by making its trade freer than those opf competitors. The classic example is New Zealand which liberalised much faster than Australia during the 1980’s and grew more slowly with lower productivity growth.

    Free trade is a chimera, and often a trojan horse for free market fundamentalists. The Asian economies of the 1970’s and 1980’s are a far better development model.

    Owen adds: I don’t agree at all. Both theory and evidence tell us that in almost every circumstance a population is made better off by having free trade.

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