Economic nationalism is still there

Virtually any economist will tell you that free trade is the best thing for the welfare of all. Some will tell you that it has to be be free and 'fair' trade.

What is certainly true is that consumers benefit from the lower prices due to competition caused by free trade. European consumers have certainly benefited massively from cheaper goods made in China in recent years.

Of course there are losers as well as winners in this process. Many of those who made goods now supplied by the Chinese have lost their jobs and some firms have closed down. The knowledge that these resources are now released to be used in more profitable areas of the EU economy is of little consolation to the unemployed.

Governments are not good at practising what they preach. While a government claims to support free trade they are nervous about the votes of those adversely affected in the declining industries. They act to protect them and slow the transition, or even stop it.

One way of defying free trade is to claim a competitor is 'dumping' goods on the market. That technically means they are selling the goods at a price below the cost of production. The motives for a country doing this would be to raise domestic employment or to destroy the industry of another country in order to then monopolise that market.

The EU has just announced a tax (called a tariff or duty) on Chinese ceramics. Around half the cups, plates etc sold in the UK are made in China. The duty can be as much as 58.8%!

The EU is allowed to do this as an interim measure while the matter is investigated. The World Trade Organisation (WTO) can intervene but that takes a couple of years. Sadly the EU is quick to suspect dumping, usually due to complaints from EU firms and it is rarely true. The Chinese, in this case, are simply cheaper.

The attached article reveals a surprising number of cases where the EU has acted to restrict trade. In this case there seems to be more opposition that support for the move within the EU itself.

The Yahoo article is here

Who won the banana war?

The EU is well known for its protection of agriculture. Farmers in the EU have benefited from taxes on agricultural imports that have made more efficient farmers from outside the EU uncompetitive within the EU.

So perhaps it is surprising to learn that the EU has also protected farmers in the Caribbean. They did this by putting a tax on bananas grown in countries that were not former colonies of EU countries benefiting mainly former UK and French dependencies in the West Indies.

Other countries, such as Costa Rica and Venezuela complained to the World Trade Organisation that this was unfair. Their plantation grown bananas were, according to them, bigger and better quality than the small Caribbean bananas and were being unfairly disadvantaged in the EU market.

For more than twenty years this dispute raged on and now the EU has agreed to lower the tariffs on bananas. (Details are in the linked Daily Telegraph article.)

So who has 'won'. Well the non-EU colonies have greater access to the EU market, so they have a victory. The other big winner is the EU consumer who will now be able to buy bananas more cheaply as tariffs fall and competition in the market will increase.

However the tariff is not abolished, just reduced. So EU consumers will still be paying more than they could do for  bananas and so there is a continued welfare loss due to the tariff that remains.

The clear losers are Caribbean banana growers. They are high cost, small producers who operate in conditions that produced lower quality and smaller bananas than other countries. They will probably find their incomes will fall. Fortunately sugar cane is the best crop to use for making bio-fuel and the Caribbean is ideally suited to produce that leading to a rapid expansion of that industry.

A victory for partial free trade anyway.

The Daily Telegraph covers the story here