Remove Global Tariffs for Free Trade and Prosperity

Breaking Down The Barriers
Why it’s time to remove global tariffs forever

The Channel Group is an independent think tank
established to champion Free Trade
We collaborate with leading thinkers to promulgate a vision of
international free trade, the breaking down of trade barriers and the
endingofinternalprotectionistmeasures.Throughrigorousindependent
research and insightful comment, The Channel Group informs debate
and develops policy.
The Channel Group was founded in 2015 by a team with experience in
business, politics, law and finance. The partners came together to create
a strong voice for international free trade.
The Channel Group will:
• Serve as an independent expert in international trade;
• Champion business interests and support free trade;
• Work with governments and regulators to remove barriers to trade;
• Educate the public on trade issues.
Toby Illingworth
Partner
Daniel Campbell
Partner
Thomas Dempster
Partner
www.thechannelgroup.org

Foreword
The key trade-off for any country is that of the cost of imports versus the price
of exports. These factors dramatically affect a country’s view on trade tariffs and
restrictions. Even for the individual consumer in a country, there are conflicting
views about job security and low prices.
For many years, trade tariffs have been seen as a way of artificially controlling the
price of goods, ensuring that prices remain broadly stable, and, as a protectionist
measure, to ensure that native companies can still compete on price, therefore
retaining job security. However, artificial distortion of the market can create
volatility far greater than that which would have existed if the market been
allowed to expand and contract naturally.
Trade restrictions are also used to maintain economic advantage, which is not only
unethical, as it deliberately restricts growth and prosperity in less economically
developed countries (LEDC), but is also misguided, as the benefits of LEDC
growth are distributed between them and the developed nations that they trade
with.
Trade tariffs and restrictions are often referred to in the context of frontier or
emerging markets, but they are overwhelmingly imposed by the most developed
countries. The European Union enforces tariffs and anti-trade regulations against
much of Africa and Asia, restricting growth in these areas; for example France
not only leads in campaigning for these measures, it also imposes protectionist
measures against fellow members of the EU. The United States imposes punitive
tariffs on much of the world in order to protect some of its key industries. This not
only has an adverse effect on South America, specifically Mexico, but is counter-
productive to their efforts to reduce immigration across their southern border.
These measures, alongside those imposed by emerging markets, have a huge
impact on distorting what should be a free market.
The Channel Group was established to promote free trade and to work with
businesses, governments and trade organisations to end the restriction of trade,
to open up global market to competition and to abolish protectionism. This report
will highlight the benefits of removing trade tariffs as a method of helping to
increase trade. The Channel Group believes that businesses and countries will
benefit from the removal of these archaic measures.
3 | Breaking Down the Barriers www.thechannelgroup.org

Contents
Executive Summary
The case for tariffs
Early intellectual arguments for trade intervention
Terms of Trade
The OPEC example
The case against tariffs
EU Common Agricultural Policy
The principle of comparative advantage
Expert backing for free trade
Case study - The United States
Case study - The United Kingdom
Tariffs in the 21st
Century
Three historical examples of trade protectionism
America in the 19th century
EU Common Agricultural Policy
India’s “wall of protectionism”
Case studies
North American Free Trade Agreement (NAFTA)
Central European Free Trade Agreement (CEFTA)
East African Community (EAC)
Adam Smith on Tariffs
What is the impact of trade barriers?
Why is protectionism a bad thing?
Conclusion
Page
5
6
9
14
18
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26
29
Chapter
1
2
3
4
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7

Executive Summary
• International trade has an enormously positive net impact on the world,
which is enjoyed both by developed and developing nations.
• Diverse groups of countries with different economies all enjoy positive
results when they enter into free trade agreements.
• Arguments for the imposition of tariffs, even in special circumstances, are
flawed. Whilst emerging economies might see short-term security arising
from protection, there is no long-term benefit to be drawn. There are better
ways of ensuring the success of fledgling sectors.
• Tariffs and other protectionist instruments handicap technological progress,
harm poor countries disproportionately and keep prices artificially high for
consumers.
• Although tariffs, subsidies and quotas are being phased out across the
world, and the number of trade inhibiting measures has fallen rapidly in the
last 50 years, those that are left continue to impede the pace of progress.

The case for tariffs
and opposition to
free trade
In this section:
• Early intellectual arguments for trade intervention
• Terms of Trade
• The OPEC example
Among economists, if not politicians, a near-consensus on the benefits of free
trade was formed within 100 years of the publication of Adam Smith’s The Wealth
of Nations. But thinkers such as John Stuart Mill continued to entertain the idea
that tariffs and limits on transactions with foreign powers might be beneficial in
certain instances.1
In his work Principles of Political Economy, published in the middle of the 19th
Century, Mill argued that fledgling industries should be protected from foreign
interference to enable them to grow. He wrote:
“The only case in which, on mere principles of political economy, protecting duties
can be defensible, is when they are imposed temporarily (especially in a young
and rising nation) in hopes of naturalising a foreign industry, in itself perfectly
suitable to the circumstances of the country.”
He added:
“But it is essential that the protection should be confined to cases in which there
is good ground of assurance that the industry which it fosters will after a time be
able to dispense with it; nor should the domestic producers ever be allowed to
expect that it will be continued to them beyond the time necessary for a fair trial
of what they are capable of accomplishing.”2
Countries who have favoured protectionism have been reluctant to relinquish it,
and the point Mill makes is then lost: that once something becomes redundant or
1 Douglas A. Irwin – A Brief History of International Trade Policy
2 John Stuart Mill – Principles of Political Economy, Book V, Chapter 10
6 | Breaking Down the Barriers
CHAPTER 1

inhibitory, discard it. The United States has grappled with this issue, and even now
at the time of writing Donald Trump espouses protectionist policies. The question
is why is it that they are so popular, and the short answer is that they are populist.
People like to hear that their job is protected, whereas communicating the benefits
of widespread job creation is a tougher sell, especially if it means certain groups
will lose out in the short term. Protectionism is also driven by national leaders
who intervene in markets to increase their personal standing, not for the greater
benefit of the country itself. Special interest groups and trade unions supporting
industries may also become important financial donors, propping up election
campaigns in return for protection later on.
Terms of Trade
Another prominent argument for mitigating free trade is the “Terms of Trade”
principle. International prices are forced up or down organically through supply
and demand, but, particularly where demand is high and supply can be limited,
producers can artificially increase the price to benefit themselves.
The theory of reciprocal demand, posited by Robert Torrens and honed by John
Stuart Mill during the 1840s, says that countries with the power to raise prices
will find it selfishly beneficial to intervene in the free market, and to restrict trade.
An example illustrated by Professor Douglas A. Irwin in his 2001 essay A Brief
History of International Trade Policy is that of the community of oil producing
nations, OPEC (Organisation of Petroleum Exporting Countries).
OPEC is composed of 13 countries in South America, Africa, the Middle East and
Asia. It exists to regulate the flow of crude oil to countries around the world.
Current OPEC Members

By agreeing quotas, OPEC effectively sets the price of oil and it is only when
demand for oil reduces rapidly, such as occurred in 2015, that it lose control of
the price.
By restricting the flow of oil, OPEC can improve its own terms of trade at the
expense of nations that are net importers of the resource. OPEC’s control of
the oil market has left some observers wondering whether it should be correctly
labelled a ‘cartel’.3
Iran and the OPEC crisis
The reintroduction of Iranian oil to the global mix in 2016 shows what can happen
when a monopoly is broken. In return for calling a halt to its nuclear programme,
western powers including the UK and US removed an embargo on oil exports
from Iran, as well as unfreezing important assets.
With unfettered access to the market, Iran began producing a lot more oil –
around 2.4 million barrels a day compared with 1.6 million in 2014 – exerting
downward pressure on global prices.
This exacerbated deflationary trends caused by booming shale gas production in
the US, crumbling demand from major developing powers and global efforts to
switch to non-carbon-based green energy.
In response to the global supply glut, Qatar’s energy minister, Mohammed bin
Saleh al-Sada, who holds the rotating presidency of OPEC, called for restrictions
on supply. But Saudi Arabia, the de facto leader of OPEC, refused, while Iran
called the restrictions “a joke”.
The crisis bubbling within OPEC countries shows that limits on free trade are not
easy to maintain, particularly within groups with only passing shared interests.
In this case artificial price fixing is an incentive for other countries to invest in
alternative sources and self-sufficiency, thereby reducing demand.
Another problem with the theory of reciprocal demand is that only the country or
countries with control over the price of a product have a chance to benefit. The
system does not create the quid pro quo benefits of free trade and instead stacks
the chips in favour of one side, to the detriment of the other.
In summary the argument against free trade is the argument for special interests
and protectionism. It ignores the need of small economies to develop and the
global benefits that encouraging growth in these markets bring in the long-term.
Moreover, it is usually driven by politics and not sound economic theory.
Countries that continue on a path of protectionism cannot ultimately compete
with the world market because it breeds a narrow mind-set. They benefit a few
and harm many, which stifles growth and innovation. These policies are better left
in the past where they belong.
3 Daniel Indiviglio - ‘Is OPEC A Cartel?’ The Atlantic Magazine, May 2009

The case against
tariffs
In this section:
• EU Common Agricultural Policy
• The principle of comparative advantage
• Economists for free trade
One of the biggest protectionist trade deals of modern times is the EU’s Common
Agricultural Policy or CAP.
The CAP subsidises farm production within the EU and has been heavily criticised
by the proponents of free-trade. There are several points of opposition, which
include:
1. It maintains artificially-high prices
Tariffs on imports and subsidies given to domestic producers reduce competition
and keep prices artificially high, meaning consumers across the EU pay more for
farmed goods than they would under a truly competitive market accessible by
businesses and other groups in developing countries.
2. It discriminates against developing nations
Countries in the developing world rely heavily on agriculture as a means of
economic growth. By effectively fencing off Europe as a destination for trade
in certain agricultural goods – together with similar systems in other developed
countries such as the US – it restricts poor farmers from improving their lives.
The Food and Agriculture Organisation (FAO), part of the United Nations, says
agriculture is the main source of income for 7 in 10 of the world’s poorest people.4
4 Global agriculture towards 2050, FAO paper October 2009
CHAPTER 2

3. It encourages oversupply and waste
The EU purchases millions of tonnes of produce every year at agreed prices to
prop up the area’s agricultural businesses. This has led to significant waste. In
2006 alone the EU amassed 13,476,812 tonnes of cereal, rice sugar and milk, and
3,529,002 hectolitres of wine.
Although this was a remarkable year and stocks have reduced in the years since,
over-production has regularly created a glut of produce.
4. It stifles the growth of small farms
Subsidies are paid per hectare to farms regardless of their size and the payments
do not account for economies of scale which make larger businesses more efficient
than smaller ones.
If subsidies are set at a nominal €50 per hectare, a 1,000 hectare farm would
receive €50,000, while a 10 hectare farm would get just €500. Essentially, CAP
payments favour bigger farms and penalises start-ups and growing businesses,
making it harder for them to compete.
In recent years the EU has begun taking steps to redress the balance and
encourage small farms, but many argue the imbalance is still unfair.
In 2010, the then European Commissioner for Agriculture and Rural Development
Dacian Cioloş affirmed his commitment to “a fair standard of living” for all farmers
and a “thriving agricultural sector”.
He added: “small holdings represent an important share, not only in the new
Member States but also in South Europe”, adding that modernisation was a key
ingredient towards reform in the sector. Yet progress remains slow.
Arable Land Area (million hectares)
1800
1600
1400
1200
1000
800
600
400
World Developing Developed
1960 1980 2000 2020 2040
Source: FAO

Comparative advantage
In a very real sense, the arguments against EU’s Common Agricultural Policy are
arguments against protectionism in general. The world’s recognised economists
are just about unified in their view that tariffs restrict growth and damage markets.
They may protect domestic markets from outside pressures, but by limiting the
development of rival economies they hit competition and damage themselves in
the long-term.
This is underpinned by the principle of comparative advantage, which states that
gains from free trade outweigh short-term setbacks and ultimately create many
more jobs overall.
This happens because countries can specialise in the production of particular
goods and services and gain a trade advantage in these areas thus creating a
demand. Different countries specialise in different goods, so in theory every
country can benefit.
When a country becomes successful at exporting certain goods, the money
flowing into the country creates a ripple effect that benefits everyone. Suddenly,
because of the increased wealth of the country, there is extra demand for better
clothing, gifts and leisure activities, for example.
Demand for these new products and services stimulates the creation of new
businesses and eventually the whole country becomes richer. In turn this creates
a new or more powerful market for developed countries to supply – such as is the
case in countries like China, India and Brazil.
By restricting trade via tariffs or similar methods, countries have a harder time
creating specialisms and the whole world loses an opportunity to develop.
Expert backing for free trade
Almost all economists back the concept of free trade over protectionism.
Milton Friedman and Paul Krugman, both winners of the Nobel Prize, have been
staunch supporters. They claimed that stripping the world of protectionist policies
such as tariffs is of huge benefit to workers in developing countries.
This, they said, is true even in countries with working conditions and safety
standards that are below Western norms. Paul Krugman went so far as to write a
paper entitled ‘In praise of cheap labour – bad jobs at bad wages are better than
no jobs at all’.5
5 Paul Krugman, In Praise of Cheap Labour

Former Federal Reserve chair Alan Greenspan wrote that protecting labour within
a country causes “an atrophy of our competitive ability...If the protectionist route
is followed, newer, more efficient industries will have less scope to expand, and
overall output and economic welfare will suffer”.6
The French political economist Frédéric Bastiat put it more succinctly: “When
goods cannot cross borders, armies will.”
Case study: The United States
Even one of the world’s brightest beacons of capitalism, the United States of
America, has made some questionable forays into trade restrictions – long after
the official period of protectionism ended.
When the coalition forces invaded Iraq in 2003, France decided not to join
the allied powers in their attempt to depose Saddam Hussein. As a revenge
measure, George W. Bush considered imposing a 300% tax on Roquefort cheese.
Fortunately for epicures across the US, it was never implemented.
According to the Footwear Distributors and Retailers of America, a trade group,
US companies and consumers paid $2.7 billion extra for shoes in 2014 because
of tariffs placed on their imports. This happened despite companies such as Nike
campaigning against them.
In July 2015 the US International Trade Commission ratified tariffs and anti-
dumping measures on tyres made in China. The Tariffs make the tires 35% more
expensive.
Not even the humble paper clip is immune. Americans buy billions each year
and their price is protected by a tariff designed to price out Chinese imports.
Interestingly, plastic coated clips are immune.
The US is the world’s third largest peanut exporter, selling up to 250,000 tonnes
of the crop overseas each year. To protect the domestic market, however, imports
are subject to a 131.8% tax for shelled peanuts and 163.8% for unshelled ones.
Case study: The United Kingdom
The UK’s steel industry crisis was caused partly by dumping of cheap steel from
China into the market, which drove prices down and made British steel less
competitive on the open market. But arguably at least as damaging was the US’
decision in 2002 to impose a 30% tax on imports. At the time trade unions said
the move would cost 5,000 jobs in the UK and roughly 18,000 EU-wide.
The punitive nature of the tariff was magnified because it didn’t affect Canada or
Mexico – due to the North American Free Trade Agreement – nor a handful of
developing countries, so EU exports were hit disproportionately hard.
6 David B. and Cruikshank, Jeffrey L. (2000). The Greenspan Effect

In November 2003 the World Trade Organisation ruled the tariffs illegal and
authorised $2 billion in sanctions against the US if they were not lifted. President
George W Bush elected to retain the tax on imports until the EU threatened
counter measures that would affect trade in key marginal states. The US withdrew
the tariffs in December, averting a full-on trade war and disaster between the
world’s two largest economies.

Tariffs in the 21st
Century
In this section:
• Global Value Chains
• Services
• Indirect Tariffs
Global Value Chains
There is much debate about whether Trade Tariffs have a place in the global
economy. The Digital Revolution has radically changed both the volumes
and mechanisms of international trade. Supply chains are becoming more
internationally fragmented, with a shift away from single country of origin goods
towards the Global Value Chain model (GVCs). The OECD found in its recent
report on Global Value Chains:
“Technologicalprogress,cost,accesstoresourcesandmarkets
and trade policy reforms have facilitated the geographical
fragmentation of production processes across the globe
according to the comparative advantage of the locations.
This international fragmentation of production is a powerful
source of increased efficiency and firm competitiveness.
Today, more than half of world manufactured imports are
intermediate goods (primary goods, parts and components,
and semifinished products), and more than 70% of world
services imports are intermediate services.”7
The Channel Group is concerned that the cumulative effect of nominal tariffs along
the supply chain is creating a barrier to trade. The ongoing usage of tariffs is not
only archaic, but also damages business and their ability to trade internationally.
In order for firms to be competitive in a globalised economy, transaction costs
must be kept to a minimum; this is undermined by the imposition of nominal
tariffs.
7 OECD Mapping Global Value Chains 2013, p. 5.
CHAPTER 3

Companies fragment their production in order to reduce costs, making use of
the comparative advantage of different nations when producing different goods
or offering services. These savings are in spite of the cumulative cost of tariffs.
The WTO World Tariff Profiles report in 2015 found that although nominal tariffs
are low in most OECD economies, tariffs can add a significant burden by the
time goods reach their final user.8
This raises the crucial question of who bears
the cost. If all tariffs are equal then the rate of effective protection on the value
added is equal to the nominal rate of protection.9
In effect there would be no
disadvantage to consumers or producers because the extra costs would balance
out. However where there are differing tariffs or an escalation in tariffs, industries
producing final goods will benefit from a higher effective protection in contrast
to those lower down the supply chain who may have to absorb the financial loss
to protect their business.10
This could happen where two countries produce the
same component for an end product but have differing tariff rates. The result is
producers and manufacturers lower down the supply chain may see their profit
margins decrease as they take on more of the financial burden. Depending on the
number of production stages this could result in multiple tariff charges in order to
produce the final product.
8 WTO World Tariff Profiles 2015 p.186.
GVC Indicators May 2013
4.0
3.5
3.0
2.5
2.0
1.5
1.0
0.5
0.0
USA
Australia
Brazil
Germany
Indonesia
Turkey
NewZealand
Thailand
Austria
India
Japan
Mexico
Vietnam
S.Korea
CzechRep.
China
Total
Source: OECD-TiVA Database Global Value Chain Indicators, May 2013
Domestic International
Numberofproductionstages
90
80
70
60
50
40
30
20
10
0
%internationally
sourcedstages
% International (right scale)

Services
Any analysis of the impact of Tariffs normally excludes services simply because
theyare not dutiable.The services industryin the UK alone exported nearly£1.2bn
of services and the UK Information Technology industry was its largest importer
by far in 2014. The role of services is crucial for understanding comparative
advantage and competitiveness when looking at trade in value added.11
The WTO’s latest World Tariff Profile compared the duties of Most Favoured
Nations (MFN) paid on intermediate inputs by industry between the 1995 and
2008. They found a significant reduction in the additional production costs
attributable to the indirect MFN taxation on tradeable inputs, which has had a
particular effect on the automobile and transport industries.12
Indirect tariffs: Technical barriers to trade (TBT)
and Sanitary and Phytosanitary (SPS)
Technical Barriers to Trade are a category of non-tariff barriers to trade that
countries use to regulate markets and protect their consumers. However, TBTs can
discriminate against imports in order to protect domestic industries. An example
of a TBT would be a set of rules for product weight, size or packaging. In practice,
there will be a document which lays down permitted product characteristics and
production methods.13
Products are assessed against these criteria to determine
conformity.14
Technical Barriers to Trade are often used within common trading areas, such
as the European Union, and are implemented in order to protect or benefit
consumers. However, they can dissuade exporters from joining the markets due
to the high cost of compliance with the technical regulations. The harmonisation
of product standards within the EU has meant that some European exports, such
as automobiles, are uncompetitive in overseas markets. The reason for this is
that, although the same technical regulations do not exist in the export market, all
automobiles manufactured in the EU must comply with EU technical standards.
In the Channel Group’s view, the disadvantages for exporters outweighs any
benefits from the harmonisation of technical standards. Technical barriers to
Trade are a form of protectionist measure and should be removed where there is
no legitimate safety case in its favour.
SPS measures were established in a 1995 treaty by the WTO. They broadly aim
to protect human, animal, plant life and health from certain risks. Much like other
Technical Barriers to Trade, SPS act to achieve harmonisation of standards in
certain areas. These measures in recent years have increased significantly, creating
serious problems for EU exporters. A report by the European Commission on SPS
measures found that there were three main problems:15
13 UNCTAD’s Classification of Non-Tariff measures (2012) p. 15
14 UNCTAD’s Classification of Non-Tariff measures (2012) p. 15
15 http://trade.ec.europa.eu/doclib/docs/2013/april/tradoc_150986.pdf

• Governments of non-EU countries frequently go beyond what is required to
protect the life or health of their consumers and use SPS measures to shield
domestic producers in agricultural and fishery sectors from fair competition.
• Protectionist policies too often result in fewer choices for consumers and
higher prices.
• As tariff barriers for agricultural and fishery products are progressively
reduced over the years to come, such problems are likely to become even
more common.
In 2014 Michael Froman, US Trade Representative, commented that the Obama
administration had successfully eliminated unwarranted barriers to trade and
explained that while many of the measures are justified some seek a more
protectionist agenda.16
It is not improbable that these measures favour big
businesses as they have the ability to absorb losses if stock and products do not
meet the required standards.
It is compelling that two major trade bodies are in general agreement on the
disadvantages of SPS measures. A balancing act between harmonisation and
liberalisation would be more constructive for smaller producers and LEDC’s.
Increased harmonisation would negatively impact LEDC’s due to their lack of
resources, thus limiting their ability to trade freely.
26 https://ustr.gov/sites/default/files/FINAL-2014-SPS-Report-Compiled.pdf
Average MFN duty paid (%)
14
12
10
8
6
4
2
0
Food
Agriculture
Textiles
Vehicles
Wood
Transport
Plastic
Manuf.Oher
Metalprdts.
Electricals
Machinery
Chemicals
Mining
Medical
Metals
TV/radio
Paper
Petroleum
Source: Diakantoni and Escaith (2014)
1995 2008
%

Three historical
examples of
protectionist
policies
In this section:
• America in the 19th century
• EU Common Agricultural Policy
• India’s “wall of protectionism”
Despite protectionist policies declining greatly in both number and ferocity across
the world in the last 100 years, there are still dozens of structures designed to
inhibit trade and protect indigenous industries.
Below we consider one example from history and two contemporary instances
whose impacts are still being felt around the world. It’s worth remembering
that these are just a small sample of the tariffs and quotas existing today that
marginalise free trade.
Protectionism in the emergent United States
Despite being the world’s most famous capitalist democracy, the US has a long
history of trade protectionism. Abraham Lincoln was an opponent of free trade
and created a 44% tariff to help the country build the Union Pacific Railroad
during the Civil War.
Later, in answering a complaint from the British Empire about US trade policy,
President Ulysses S. Grant pointed to Britain’s own protectionist history and
claimed the same policy was essential to embed his country’s emerging economic
strength.
CHAPTER 4

“For centuries England has relied on protection, has carried it to extremes and has
obtained satisfactory results from it. There is no doubt that it is to this system that
it owes its present strength,” he said.17
“After two centuries, England has found it convenient to adopt free trade because
it thinks that protection can no longer offer it anything.
“Very well then, gentlemen, my knowledge of our country leads me to believe that
within 200 years, when America has gotten out of protection all that it can offer,
it too will adopt free trade.”
More than 100 years after Adam Smith published The Wealth of Nations, William
McKinley, a single-term president in office between the years 1897 and 1901,
continued to underline the protectionist principles.
He claimed: “Under free trade the trader is the master and the producer the
slave. Protection is but the law of nature, the law of self-preservation, of self-
development, of securing the highest and best destiny of the race of man.
“[People say] that protection is immoral.... Why, if protection builds up and elevates
63,000,000 of people, the influence of those 63,000,000 of people elevates the
rest of the world. We cannot take a step in the pathway of progress without
benefiting mankind everywhere.”18
Protectionism remained the formal policy of the US until after World War II,
when industrialised countries, including its allies, had been brought to their knees
financially by the crippling effect of the conflict.
The EU’s Common Agricultural Policy
Europe’s Common Agricultural Policy (CAP) is the most expensive and most
controversial scheme run by the EU, and can trace its origins back to the late
1950s. The CAP is essentially a set of subsidies issued directly to farms within
member states to support production and fend off competition from countries
outside the group.
In 2013, a BBC report stated that the CAP constituted 40% of the EU budget,
down from 71% of the budget in 1984.19
17 Kicking away the ladder: The real history of Free Trade, Ha-Joon Chang, Foreign Policy in Focus Dec 2003
18 William McKinley speech, Oct. 4, 1892 in Boston, MA William McKinley Papers
19 Q&A: Reform of EU farm policy, July 2013 http://www.bbc.co.uk/news/world-europe-11216061

Originally under the CAP, the European Community (as it was then known) agreed
to buyproduce from farms if the price of produce fell belowa pre-determined level.
It reduced imports of food from outside the group, but created vast mountains
and lakes of farm and dairy produce.
After several rounds of reform the EU introduced the Single Payment Scheme,
under which EU members can opt to pay individual farms or farming regions. In
return for payments, farmers have to meet environmental targets and avoid the
production of certain crops that do not come under the scheme.
Under the system, imports of agricultural produce are heavily taxed, helping to
keep EU farmed food among the most expensive in the world.
One of the biggest backers of the CAP is France, which is also the biggest
beneficiary, claiming more than €10 billion of subsidies each year. At the creation
of the common market, France negotiated the subsidies in return for agreeing to
free trade in factory-produced products.
India’s ‘wall of protectionism’
India is moving from being a closed economy with average tariffs topping 200%,
and strict quotas on goods entering the country, to a more open system of trade
policies. The country began its tentative road to reform 25 years ago, and even
then it agreed to change tack only when it was absolutely necessary to do so.
The process eventually sped up and today, according to the World Bank20
, India is
one of the world’s fastest growing economies with a diverse range of industries:
20 India: Foreign Trade Policy, The World Bank Website http://web.worldbank.org/
0 2 4 6 8 10 12
France
Germany
Spain
Italy
UK
Poland
Greece
Romania
Ireland
Hungary
Austria
Portugal
Netherlands
Denmark
Sweden
Belgium
0 2
Czech Republic
Finland
Bulgaria
Slovakia
Lithuania
Latvia
Slovenia
Estonia
Cyprus
Luxembourg
Malta
Total CAP allocations in 2009
Euros (billions)
Source: European Commission

“Trade reforms have produced remarkable results. India’s trade to GDP ratio has
increased from 15% to 35% of GDP between 1990 and 2005, and the economy
is now among the fastest growing in the world.
Average non-agricultural tariffs have fallen below 15%, quantitative restrictions on
imports have been eliminated, and foreign investments norms have been relaxed
for a number of sectors. India has adopted a leading role among developing
nations for better trade links and a liberalised global system of business. It played
a major role in the Doha trade negotiations and has ratified a series of regional
and bilateral agreements, including with China, South Korea, Bangladesh, Bhutan
and Sri Lanka.
Despite its speedy economic development in recent years (a rate well over 7% in
2015), India has failed to open up completely and still imposes steep agricultural
tariffs, anti-dumping measures to prevent cheap raw materials flooding its markets,
and limits on foreign investment in its retail trade.
Composition of India’s Exports
Commodity Group Share %
1990-91 2005-06
Agricultural & Allied Products 19.5 10.2
Ores and Minerals 4.4 5.2
Manufactured Goods 73.0 72.0
Crude & Pertroleum Products 2.9 11.5
Other Unclassified Items 0.2 1.1

CHAPTER 5
Three Free Trade
Agreements
In this section:
• North American Free Trade Agreement (NAFTA)
• Central European Free Trade Agreement (CEFTA)
• East African Community (EAC)
There are hundreds of free trade agreements between countries around the
world. Some are bilateral and others are multilateral – or a commitment between
a group of countries to trade on more flexible terms.
The World Trade Organisation says nearly all of its member states have entered
into agreements. In the years between 1948 and 1994 when the organisation
was established, 124 agreements were arranged; since then there have been
more than 400.
The deals have helped the participants trade with each other, but have also
triggered extra trade from countries outside the agreement, particularlydeveloped
nations looking for regions in which to invest.
Here are just three examples of free trade agreements and the impact they have
had on the participating countries’ economies.
The North American Free Trade Agreement
(NAFTA)
NAFTA was signed in January 1994 between the US, Canada and Mexico. The
agreement notionally launched a market with 460 million participants worth
nearly $20 trillion.21
21 America’s Trade Policy – NAFTA at 20: Has it been a success? Samuel Benka

The treaty immediately banned tariffs affecting around half of Mexican exports
to the US and about third of exports from the US heading south of the border.
Within a decade almost all tariffs between the two countries were removed.
More than 20 years since the agreement was signed NAFTA has helped to
increase trade between its participants by about 400%.22
The breaking down of
borders led to inefficient businesses closing in all three states, but created more
and better opportunities for other organisations.
Canada’s trade with the US tripled and increased marginally with Mexico despite
there being a pre-existing free trade agreement between the two countries.
For Mexico, trade with the US increased 500% within 20 years, and although some
small farmers were pushed out by larger US-based producers, the agreement has
helped to establish many global businesses in Mexico.
Meanwhile, in the US, a survey of leading economists revealed that 95% thought
NAFTA had a net positive impact on people and businesses.23
The US Chambers of Commerce says NAFTA was the driving force behind a steep
rise in trade with Canada and Mexico between 1993 and 2011. During that time
the value of trade increased nearly four-fold from $337 billion to $1.2 trillion.
NAFTA is also credited with increasing foreign direct investment between the
countries, creating or safeguarding jobs and increasing mobility of workers in the
area.
22 America’s Trade Policy – NAFTA at 20: Has it been a success? Samuel Benka
23 IGM Forum http://www.igmchicago.org/igm-economic-experts-panel/poll-results?SurveyID=SV_0dfr9yjnDcLh17m
US trade with Canada and Mexico since NAFTA (billion US$)
700
600
500
400
300
200
100
0
1993
1994
1995
1996
1997
1998
1999
2000
2001
2002
2003
2004
2005
2006
2007
2008
2009
2010
2011
Source: US Chamber of Commerce
Mexico Canada
$

CentralEuropeanFreeTradeAgreement(CEFTA)
CEFTA is a trade agreement between non-EU countries in south-eastern Europe.
There are seven member states of Albania, Bosnia and Herzegovina, Macedonia,
Moldova, Montenegro, Serbia, and Kosovo.
Founded by Poland, Hungary and the former Czechoslovakia, CEFTA is a feeder
agreement to the EU. Once a country joins the EU – and several countries are
currently considered viable candidates – their membership of CEFTA is voided.
Speaking in November 2003, Anton Rop, then Slovenian prime minister, summed
up CEFTA’s role:
“Our economies must be made capable of conducting business in its most
demanding forms and of engaging in the processes of competition that take place
within the European Union.
“The role of CEFTA has been of great importance in this regard; it shall continue to
be so. CEFTA has not only strengthened economic and trading links between its
member states; it has also contributed to wider European integration processes.
“It constitutes an exceptionally useful “learning process” or a process of preparing
for transition to the conditions of sharp competition that a single market entails.
CEFTA is a rehearsal for the complex processes of nominal and real convergence
with the high standards of competition that exist in the European Union.”24
But the agreement is considered to be of considerable benefit to its members in
its own right. Over the years it has provided a major boost to trade in the region
and has gone some way to reducing conflict between its members.
Summing up its impact in 2002, former Hungarian foreign affairs minister Géza
Jeszenszky said it had increased regional stability in the post-Communist era:
“After the Visegrad summit in 1992, our ministers of the economy decided to
set up CEFTA. During the Soviet regime, we did not trade with one another. The
resumption of trade among our countries was critical for solid cooperation and
stability in the region.
“With time, we opened CEFTA to all regional participants who wanted to join,
enlarging the area of cooperation and stability.”25
24 Anton Rop, Address to CEFTA member states, November 2003
25 Geza Jeszenszky, September 2002

East African Community (EAC)
The East African Community is a group of five countries (Burundi, Kenya, Rwanda,
Tanzania, and Uganda) committed to political and economic integration.
The organisation was originally founded in 1967, collapsing 10 years later and
later re-established in 2000. It created a free trade zone and a customs union, and
by 2010 had eradicated internal tariffs. In 2013, members signed a protocol on
monetary union and there is talk of creating a single group of federal states called
the East African Federation.
The EAC’s impact has benefited countries throughout Africa. In 2008 members
agreed a free trade arrangement with the Southern Africa Development
Community and the Common Market for Eastern and Southern Africa, expanding
economic cooperation greatly across the continent.
Several other countries have applied to join the EAC including Sudan and Somalia,
while there is also interest in widening membership to eventually include Malawi,
the Democratic Republic of Congo and Zambia.
The trade pact is not perfect, for a start it imposes tariffs on imports from third
parties, albeit at a lower rate than before. But business leaders note increased
trade within the group in the sectors of education, health, financial services and
tourism.
A report published by the World Trade Organisation late in 2012 concluded
that “regional trade flows have increased significantly” owing to “continual
regional integration efforts”. It added, “Additional efforts, such as investment
in infrastructure and streamlining administrative procedures, are expected to
generate greater and more sustainable benefits.”26
26 WTO trade policy review: East African Community, November 2012

CHAPTER 6
Adam Smith
on tariffs
In this section:
• What is the position of the Adam Smith Institute?
• What is the impact of trade barriers and what happens when they are lifted?
• Why is protectionism a bad thing?
The Adam Smith Institute exists to promote libertarian principles and the free
market globally. It is an economics think tank and pressure group which describes
itself as “empiricist”, with a “deep optimism about the world”.
Here, the Institute’s head of research Ben Southwood and executive director Sam
Bowman were interviewed by The Channel Group on their world view and give
details as to why free trade is a force for good and protectionist policies are a
brake on progress.
Why are tariffs and quotas a bad thing?
BS: They impede economic efficiency, and reduce economic output, by stopping
production of particular goods from moving to where it can be done most
efficiently. In other words they lower quality and quantity for the cost.
What are the best examples of them encumbering trade and putting economies
back?
BS: Historically the UK had unilateral free trade (or close to it), and didn’t put
quotas or tariffs on imports from any country, whether or not those countries
did the converse. Obviously Britain was the world’s economic superpower until
recently.
By contrast most other countries (the USA, France, Germany and so on) had quite
extensive tariffs as they developed.

Currently the food tariffs involved in the EU’s Common Agricultural Policy distort
activity towards farming, when it could be used to produce other things which
add more value, and when it could be sited in poorer countries.
What good examples are there of the positive impact of tariffs, quotas or other
barriers being lifted?
BS: New Zealand greatly liberalised its agricultural sector under PM Mike Moore
and his finance minister Roger Douglas, scrapping tariffs and subsidies in a short
space of time. It rapidly rationalised and grew in efficiency and is now extremely
productive after having been moribund for a very long time.
The success of the EU is partially a story of the success of trade liberalisation. The
growth of countries like Ireland owes a lot to the ability of large multinationals to
base themselves there and then sell their products to a very large consumer base
(the rest of the EU) without impediment. Other regional trade organisations like
NAFTA or ASEAN’s AFTA do something similar to varying degrees.
And, of course, the stunning growth of China since 1980 owes itself largely
to the country replacing protectionist communism with relatively free markets
domestically, and for imported and exported goods.
What are the main arguments for trade protectionism and why are they wrong?
SB: The bad arguments for protectionism have to do with protecting jobs from
competition – these arguments miss the fact that it is domestic consumers that
end up subsidising those jobs, and doing so in an inefficient way.
The best argument for protectionism is that some industries need temporary
protection in order to grow – the “infant industries” argument.
This is flawed, however, because it is very difficult for governments to pick winners
this way, and the private sector has functions to do this anyway through equity
and debt, if the firm or firms are expected to become profitable at some point in
the future.
There are a few countries that have succeeded with the infant industries approach
but there are many more that have failed miserably. Free trade has a better record
overall.
If all trade blockages were lifted globally, what would be the impact?
SB: In fact, most tariffs already have been lifted between large economies, so the
impact on global GDP would be fairly small – perhaps as little as a 4% boost.

However, this would be mostly concentrated in poor countries, whose economies
are very small, so what globally looks like a small boost could actually mean an
enormous boost to living standards for the world’s poor.
It’s difficult to say what lifting all non-tariff barriers would do – through mutual
recognition of standards between members of the OECD, for example – but it
would probably be larger and may have a positive knock-on effect of encouraging
poor countries to liberalise to be able to export freely to the world’s rich countries.
As we have seen, the economic growth gains from trade may be surprisingly
small, because we have already abolished the worst barriers globally.
But this does not mean that free trade is irrelevant – the poorest countries are still
both protectionist and protected-against, which hurts consumers and producers
in those countries (which means everyone). Free trade as a poverty-reducing
policy should not be underestimated.

Conclusion
In this paper The Channel Group has set out the argument against trade tariffs
and protectionism. The case for Trade Tariffs is archaic and in our view no longer
holds any weight in the world economy. They impose onerous burdens on small
businesses and prevent industries within countries from reaching their full
potential. In a world where many producers and manufacturers have fragmented
supply chains, it is often the smallest enterprises that suffer because, as we have
shown, they must bear the cost in order to be competitive.
We know the solution is not a simple one and indeed in some regions may not
be terribly popular. The allure of protectionism has arguably helped weaker
economies in the past and have allowed state owned industries in particular
to flourish. Even now, in trading bodies such as the European Union, non-tariff
barriers are used to indirectly restrict the flow of trade from LDEC’s as they create
an unequal playing field. In some industries such as healthcare this would be seen
as a positive, but when you are a smaller manufacturer from outside a trading
body it can be expensive to comply with that bodies rules and procedures. This
means that larger trading bodies maybe denying smaller countries and businesses
from entering their market by the use of overzealous regulation. These policies
fundamentally undermine the principles of free trade.
International trade has an enormous net positive impact on the world which is
enjoyed both by developed and developing nations. The examples cited reflect the
fact that diverse groups of countries with different economies all enjoy positive
results when they enter into free trade agreements together.
Equally, arguments for the imposition of tariffs, even in special circumstances, are
flawed. While emerging economies might see short-term security from protection,
there is no long-term benefit to be drawn from charging foreign companies for
supplying goods.
There are better ways of ensuring the success of fledgling sectors. Tariffs and
other protectionist instruments handicap technological progress, harm poor
countries disproportionately, and keep prices artificially high for consumers.
Although tariffs, subsidies and quotas are being phased out across the world and
the number of trade inhibiting measures has fallen rapidly in the last 50 years,
those that are left continue to impede the pace of progress.

Free trade is part of the solution to poverty and consequent problems of illiteracy,
conflict and high mortality rates. Through trade the world can develop greater
harmony and understanding, reducing arguments and promoting peaceful co-
existence.
The concept of ending Trade Tariffs and protectionism is not a simple one and the
road has many hurdles but with the introduction of the Trans-Atlantic Partnership
and other multi-national trade agreements there appears to be a willingness to
shake off these old habits. Protectionism must be abolished and Trade Tariffs
along with it. Our reason for supporting free trade is simple: we believe it to be
the best route to economic prosperity for all nations.

31 | Executive Summary | Breaking Down the Barriers www.thechannelgroup.org

Remove Global Tariffs for Free Trade and Prosperity

Remove Global Tariffs for Free Trade and Prosperity

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