Thursday, 9 October 2014

Free trade

James Higham wrote about this at Orphans, there's no point me summarising you might as well pop over and read the whole thing but here's the flavour:

And therein lies the dilemma of free trade. As a staunch advocate of small and medium business ‘free’ enterprise, at what point does this become advocate of south-east Asian sweatshops?

Within our own country, we rail against – and quite rightly too – government interference designed to skim off any profit before the business can even get on it s feet, so that’s the opposite extreme.

I commented:

Most people assume that "free trade" means international and cross-border, but internal free trade rules are just as important.

So if the USA enters into a so-called "free trade" agreement by which US companies are granted monopoly rights and protections in the other country, that is simply not "free trade". Had the other country granted those rights to its domestic producers that would not be free trade, why is it any different if it grants those rights to foreigners?

As luck would have it, to illustrate the point, there was an article in yesterday's FT:

You may think, like the Heritage Foundation, that Hong Kong is a free market. However, except for external trade, it is not.

Instead it is what one of the richest men in the city once described to me as “a nice bowl of fish soup”. That soup is fed to the few, making ordinary people poorer, stoking resentment, and indirectly contributing to acute pollution.

Apparently everything - from housing to public transport to supermarkets - is run by a few large cartels.
Or, turning to the worst tax of all, VAT, that is not particularly a barrier to imports and exports - but it is a barrier to free trade within a country.

Imagine that Scotland had voted for independence and rUK imposed an import duty of 20% on everything we bought from Scotland and vice versa, would we view that as anti-free trade?

Yes of course, but that's no different to VAT, which has exactly the same effect on economic activity. It's like treating each business as a foreign country and imposing a 20% import duty when a UK based consumer spends his own money on goods and services from it.


Lola said...

And there's this, serendipitously,

Lola said...

Free trade is free trade. It was always free. It has become unfree because of governments. Governments entering into free trade agreements are really boosting their own power?

DBC Reed said...

Why are cartels (in supermarkets for instance) not the result of internal free trade? You are not suggesting that rich bastards should be restrained by governments from carving up markets for their own profit surely? Viva Uncle Joe (Chamberlain, that is)!

Mark Wadsworth said...

L, thanks and agreed.

DBC, supermarkets are a cartel from the point of view of their hard pressed suppliers (as Shiney Mart has explained often enough) because of their vast buying power, but between themselves and from the point of view of the consumer they are quite competitive.

Tesco take the piss with land banking and planning, that's a slightly separate topic.

And no, RPM is not the answer, we've done that one.

Derek said...

Cartels aren't really a product of free trade. Cartels are caused by barriers to entry, physical or legal. If it's easy for newcomers to enter a market, the existing suppliers will find it almost impossible to form a cartel. If it's difficult to enter, they'll find it easy to form one.

Mark Wadsworth said...

D, well yes and no.

There is such a thing as minimum efficient scale.

If there is demand for one million units of something a year and the MES is 100,000, there will be ten suppliers, if the MES is 500,000 or more there will only be one supplier.

And similarly, a monopoly depends on how big market you are looking at.

So if one company runs all cross channel ferries, is that a monopoly? People can still take the Eurostar, or take the plane, or go by ferry to Holland or elsewhere in France, os simply not bother.

What we have with supermarkets, maybe it really isn't a cartel in the sense of collusion, it's more that they are much more powerful than their suppliers. And as Aldi and Lidl have shown, you can break into the cartel (although they were already huge ten years ago).

So diamonds are a cartel or monopoly if you look at De Beers relative to world diamond market, but people don't have to buy diamonds, they can buy other fancy baubles to keep their wife or girlfriend happy.

DBC Reed said...

Fortunately, the American Supreme Court looked at RPM and legalised it in 2007.Heath banned its widespread use in UK (1964?)to get into EEC. Textbooks date the spread of supermarkets to this early Tory interference in a free market arrangement. See Helen Mercer on Abolition of RPM.

Lola said...

MW. I rather thought that the supermarket 'cartel' was the result of very bad tax policy and the absence of the balancing effect of LVT between the 'High Street' and out of town superstores whose yield per foot is vastly better than the 'High Street'?

Lola said...

DBCR. Anything that controls prices is not, by definition, Free Trade or markets.

DBC Reed said...

Big supermarket chains discount the suppliers/manufacturers prices (and make them take the hit and charge them for displaying their goods).Are you saying this control of prices is state directed? Or is this the chains' misuse of the freedoms they have ( or have been given post-1964)? You appear to be challenging the collective wisdom of the American Supreme Court.
NB RPM is a free-market arrangement by freely contracted agreement.

Lola said...

DBCR. There's your error. Assuming that the US Supreme court is 'wise'. It ain't. It's highly politicised. Even if it weren't the thing you eventually learn in life is that the Great and the Good, aren't.
I have a very good friend that supplied big groups with good for years. He does very well out of it.

DBC Reed said...

@L Stop patronising me: I am almost certainly older than you !( I am nearly always the oldest on most sites.)
The famous case : Leegin Creative Leather vs PSKS dba Kays Kloset which I followed as it unfolded , had an extensive summary on the Net which was up there for months afterwards. If you were familiar with this, you would know that the case revolved around the evidence of academic witnesses who argued RPM out in some kind of combative seminar procedure .It was highly academic not political.RPM won out 5-4 in what frankly was a turn-up for the book, though Kenneth Elzinga who led for RPM has never lost a case of this kind.
You have not answered any of my points about supermarkets removing the suppliers' and manufacturers' freedoms to set their own prices in ways ,moreover, which create loyalty ties between manufacturer and retailer and allow manufacturers to do forward planning in the knowledge that suppliers will not make their classy goods look run of the mill and cheap in shops.Also all the shops selling the same goods at the same price preserves small shops in High Streets and suburban malls.Leegin found that RPM could be procompetitive and a rule of reason should be applied to see if it was (not a blanket per se ban as in the EU.)
It is the ban on RPM which shows the State interfering in free trading practices in our case a supra State authority. The British High Street evolved under rpm aegis: the out of town supermarket sprung up in response to EEC edict.