The EU is not a bastion of protectionism

Jamie Powell at FT Alphaville has debunked the USA's claim to be the least protectionist trade area in the world. With the help of a couple of useful charts, he shows that it comes in a modest ninth on the list in trade-weighted terms. Go Jamie. The "victim America" narrative really needs to be stamped on, hard. America's trade deficit is not caused by mercantilist trade policies in other countries, it is an inevitable consequence of the dominance of the dollar - and is thus a measure of America's post-war success.

But in the course of debunking the USA, Jamie also incidentally debunked the Ultra Brexiters.

The Ultras insist that the EU is a bastion of protectionism, with extremely high tariff barriers to third countries. Indeed it does have very high tariffs for some products, mostly agricultural. But in the trade world, fallacies of composition abound. It is not safe to allege that a country or a trade bloc is extremely protectionist simply because it has high tariffs on a few products.

Jamie's charts show that the Ultras are very wrong. The EU's average tariff is low by international standards on both bound and trade-weighted measures. In fact it is lower than the average tariff of some of the countries that the Legatum Institute, mouthpiece of the Ultras, says could be part of their post-Brexit free trade paradise. You couldn't make it up.

Jamie didn't write about this, though - it is just evident from the charts. So I've borrowed the charts.

Here's the first. It actually comes from Eurizon, who used it to justify their claim that the US is "by far the least protectionist nation in the world". Never mind the US, just look at the EU28:


EU28 average bound tariff is among the lowest in the world. It is substantially below the bound tariffs of Australia, New Zealand and even Singapore, which the Ultras regard as a shining global example of unilateral free trade.

Of course, as Jamie points out, the bound tariff is a limit, not a target. The actual tariffs operating in practice are usually much lower. But it is interesting that the maximum average tariff that a "bastion of protectionism" will apply is only about half that of a "beacon of free trade" like Singapore, wouldn't you say?

But what about the actual tariffs? Surely the EU28 is far more protectionist in reality?

Here is Jamie's second chart. It shows the trade-weighted average tariffs in operation across the thirty countries and trade areas from the Eurizon chart, calculated from WTO data using applied tariffs (yes, the ones that operate in practice, not the bound tariffs) and trade volumes:



The EU28 has an average tariff of just over 3%, about the same as Canada and not far above the US's 2.5%. Protectionist? Not much.

Admittedly, this chart does show that Singapore's tariff barriers are in practice very low. The Ultras are right about that. But Australia's are significantly higher than the EU's, at 4%. And New Zealand's are not a lot lower than the EU's, at 2.5%.

The Ultras' dream of "like-minded countries" combining to create a free trade paradise appears to be a pipe dream. With the possible exception of Singapore - which is a city-state, not a country - nowhere on earth has genuinely free trade. The UK is not going to find trade any freer outside the EU than it does within it. Indeed, Jamie's charts show that most of the world is significantly more protectionist than the EU. This isn't a paradise, it's a shark pool.

Of course, as the image at the head of this post shows, tariffs are only one dimension of protectionism. Non-tariff barriers matter too, especially for a services-driven economy like the UK. The EU does have significant non-tariff barriers. But then so does every country. They arise from distinctive national characteristics such as law, language, educational qualifications, culture. In fact it is probably impossible to eliminate non-tariff barriers without seriously compromising national identity and self-determination. The Ultras need to decide what is really important to them - completely free trade, or sovereignty. They can't have both.


Related reading:

Game theory in Brexitland
The Mystery of Jacob Rees-Mogg's Recklessness - Forbes
Brexit and the Globalization Trilemma - Dani Rodrik

Charts from the Financial Times, obviously. Image from TES

Comments

  1. " The Ultras need to decide what is really important to them - completely free trade, or sovereignty"

    Coppola's Di-lemma.

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  2. Hello Frances, sorry to disagree on this one, but the EU is enormously protectionist. It's not seen in tariff, but in non-tariff barriers, rules of origin, quotas, farm subsidies, etc. So is the USA.

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    Replies
    1. Your statement that "the EU is enormously protectionist" needs expansion. Protectionist by what measure? In comparison with which country or countries? Without that, it is meaningless.

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    2. This comment has been removed by the author.

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    3. You have a good point. Here go some numbers. It is quite protectionist (not the most protectionist of all, but one has to analyse the incidence as well). The US has 5.356 non-tariff measures (NTM). China has 2.771 NTM. The EU has 2.106. Brazil has 2.406. Chile has 1.089, and Argentina has 709, according to 2017 WTO numbers. Here is an analysis of the impact of NTM on agricultural exports of developing countries (and the US and the EU stand by a mile among the most protectionists on this issue, ask the French). https://cepr.org/sites/default/files/2486_MOHAN%20-%20How%20important%20are%20tariffs%20and%20nontariff%20measures%20for%20developing%20countries'%20agricultural%20processed%20products%20exports.pdf

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  3. Surely the corollary of this is that leaving the Single Market and Customs Union and trading with the EU subject to its external tariffs cannot be that bad for the UK either, despite Remainers saying it will be a disaster? They can't have it both ways - either the EU is a protectionist racket and not having tariff free access will be terrible, or the tariffs aren't that high and being outside the EU won't have much effect on trade?

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    1. It's the non-tariff barriers that are the bigger issue.

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    2. One man's non-tariff barriers are another country's standards.

      You can't buy pork in Riyadh.

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    3. «trading with the EU subject to its external tariffs cannot be that bad for the UK either, despite Remainers saying it will be a disaster?»

      Indeed "Project Fear" is ridiculous and it will not be a disaster, "merely" a loss of 8-10% of GDP over 10-12 years. Which will be achieved through a further fall in wages and in the pound of probably around 20% each.

      Whichever tariff and non-tariff barriers there are, they are largely (with some exceptions) "just" a matter of cost, and cutting wages and the exchange rate can easily make english products more competitive with those from other countries outside the EU, like China or Bangladesh. It is "just" a matter of terms of trade.
      For agricultural and manufactured products the EU has a surplus with the UK, and after exit EU imports of agricultural and manufactured products will largely be replaced by imports from non-EU countries (wiping out english farms and factories); most of the hit will be on services, as free trade in services is very limited.

      The really big deal in the post-exit negotiations is "passporting", and that is not going to happen outside the EEA, and T May has said the government has given up asking for it. Then P Hammond said that indeed the government demands no "passporting" but just all of its benefits without any of its costs. As if :-).

      Anyhow, EU membership is a political choice before it is an economic one, and the benefits are more independence and sovereignty for the peoples of the member states. T Benn, who was very much a "Leaver", still wrote in 1965, and the tradeoff is the same only more today:

      Defence, colour television, Concorde, rocket development - these are all issues raising economic considerations that reveal this country's basic inability to stay in the big league. We just can’t afford it.
      The real choice is — do we go in with Europe or do we become an American satellite? Without a conscious decision being taken the latter course is being followed everywhere.
      In reality the choice lies between Britain as an island and US protectorate, or Britain as a full member of the Six, followed by a wider European federation.
      I was always against the Common Market but the reality of our isolation is being borne in on me all the time.

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    4. Blissex I voted Remain because I thought Brexit could cause a recession (at least when Article 50 kicks in), and since I believe the debt-deflation explanation of the Great Recession I think it might restart the GR, especially if it's a hard Brexit.

      Leaving that scenario aside, what's the long term effect? Here's a critique of models others have used, they get a result of a total loss of only 1% GDP per head and 2% GDP overall.

      You might not want the vid but you can read the slides. https://www.politicaleconomy.group.cam.ac.uk/presentations/couttsgudgin2018

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