What trade deals do and do not mean for domestic laws

One of the larger benefits those of a liberal economics bent often ascribe to trade deals is that they provide an excuse for stripping away dumb domestic laws. A classic scenario is something like the following.

At some point decades ago a government found it convenient to ally itself with either producers in some sector or the unions there, and as a consequence passed some dumb law that made it all-but-impossible for any new players with new methods to enter. Since that time it has never quite been politically convenient to take on the vested interests that benefit from this law, so it has hung around whilst the world moved on. A trade deal may include clauses that forbid this sort of dumbly restrictive law. The vested interests doubtless kick up a fuss, but they are doing that at the same time as zillions of other vested interests are complaining about the deletion of their own dumb laws and whilst other benefitting interests are agitating in favour of the deal.

Sometimes free trade agreements will include provisions that force change to domestic laws in this way – and that’s often a good thing. But there is no necessity about that. We can perfectly well do free trade agreements where we do not align our domestic laws. Instead, we simply accept imports made according to different standards from our own.

Sometimes this seems rather mysterious to people. Why, they say, if we have such-and-such a law about the treatment of chickens in farms domestically, would we consider importing chicken products from a country that did not match our chicken rearing standards? Why would we care more about domestic chickens than foreign ones? But that is not really the correct way to think about things. We happily import products from countries where the minimum wage is lower than in the UK. In the UK firms aren’t allowed to hire full-time staff below the age of 16, since we believe that children ought to be in education until that age. But suppose in another country, where incomes per capita are lower and public spending on education as a consequence not so high, the minimum full-time work age were 14. Would we say there could be no imports from any firm that hired workers under 16?

A key feature of free trade is the acceptance that different countries do things in their own different ways – at least within limits. There has been a tendency for free trade agreements to become more and more extensive in agreeing to regulatory alignment, but that is by no means a necessary component, nor indeed always a desirable one.

The UK will soon be negotiating various free trade deals with various countries – Australia, the US, the EU, Japan, New Zealand. Some of these partners will want to agree deals that strip away egregious laws but otherwise allow domestic regulatory variation (the US may be an example of this). Others may require little regulatory alignment at all – simply an agreement not to restrict imports or impose tariffs upon them (NZ may be an example of this). Others may seek ongoing “dynamic” regulatory alignment – so domestic laws are not merely made the same now but the partners undertake to keep them the same in the future (the EU may be an example of this).

We definitely want little, if anything, to do with the last kind of deal. Much of the point of leaving the EU is that we want to be able to set our own domestic regulation in the future instead of having the EU set it for us. For the UK to sign up to an FTA in which it agrees to shadow the EU’s rules in the future would therefore defeat much of the objective of Brexit.

One good way to avoid the pressure to agree such an ongoing-alignment deal with the EU would be to sign up quickly, before doing any deal with the EU, to deals with other countries (perhaps Australia or the US) where in the deal the UK undertook not to impose regulations that are like the regulations the EU would seek to set in the future. That would rule out any possibility of doing a “dynamic alignment” deal with the EU and would therefore force the negotiations with the EU, from the start, onto only the form of deal the UK might be interested in doing (i.e. away from dynamic alignment).

The gain from doing FTAs with Australia or the US is thus not simply about trade with the US or Australia. It is that doing deals with the US and Australia means the UK will also be able to set its own regulation domestically. And that is the really key thing that we want.


Member of Advisory Council

Dr Andrew Lilico is a Fellow of the Institute of Economic Affairs and Chairman of the IEA/Sunday Times Monetary Policy Committee.  Andrew also acts as Executive Director and Principal of Europe Economics.  He is a frequent contributor in the UK and international media on economic and financial matters, appearing on programmes such as Newsnight, the Today Programme, Sky News, CNBC and Bloomberg. Andrew received his first degree from St. John’s College, Oxford, and his PhD from University College, London, where he also lectured in macroeconomics and in monetary theory.  

1 thought on “What trade deals do and do not mean for domestic laws”

  1. Posted 12/01/2020 at 17:25 | Permalink

    Excellent discussion.

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