January 24, 2000

January 24, 2000 | Lecture on Trade, Economic Freedom

The World Turned Right-Side Up: A New Trading Agenda for the Age of Globalization

Not far from here, a little over 220 years ago, General Lord Charles Cornwallis found himself in a bit of bother due to the ragtag Continental army under General George Washington. After the heroic night storming of one of his outer redoubts by Colonel Alexander Hamilton, Cornwallis realized that he was obliged to surrender his army of British grenadiers, the finest infantrymen in the world, to the upstart colonists. This was a fact that the noble-born Cornwallis simply could not face. Rather than endure the social humiliation of surrendering in person to Washington, the noble lord feigned illness to avoid the surrender ceremony altogether. Washington, the scion of one of Virginia's oldest families, was quick to recognize Cornwallis's slight; he sent his second-in-command, General Lincoln, to meet with Cornwallis's stand-in, General O'Hara. As the British troops marched by their American conquerors, the British military band, reflecting what must have been the utter disbelief of the British army, played the tune, "The World Turned Upside Down."

Since that encounter on the banks of the James (with the notable exception of the War of 1812), Anglo-American ties have recovered from this nadir, especially during the 20th century. It is not an exaggeration to say that, in Great Britain, America has no more proven or dependable an ally. History has underscored the commonalities of the relationship with ties built on common language, common history, and common culture. It is hard to imagine another two powers having shared interests as compatible as the descendents of Lord Cornwallis and his worthy adversary.

Yet now this seemingly unshakeable relationship is being called into question, and a seminal decision regarding its future awaits Britain early in the new century. A referendum on Britain's entry into the Euro-zone1 may occur as early as the next parliament. A "yes" vote would irrevocably merge British sovereignty into a larger European supranational construct, if the rhetoric of the current Euro-zone members is to be believed. This is, quite simply, the last real chance for Britain to choose an alternate future path, one that recognizes that its natural economic and political partner remains the United States and not the European Union (EU).

THE CASE FOR BRITAIN IN NAFTA

Such a shift has its origins firmly planted in modern-day realities. When asked in a November Economist poll who was the UK's most reliable ally in a crisis, 59 percent of those polled said the U.S., with only 16 percent paying Europe that compliment. People in the UK remain profoundly skeptical of Europe and the euro; this dissatisfaction will lead them, sooner or later, to cast about for a viable alternative to being swallowed by the EU. Thus, the notion of closer Anglo-American trade ties is destined to play well in the UK. This strategy is politically viable, especially for the Tories. There is no doubt that the people of the UK remain deeply skeptical about the euro in particular and the European experiment in general. For instance, the unpopular Tories, albeit on a low turnout, stunningly won the Euro-elections of summer '99 by turning them into a referendum on joining the euro. A September 1999 survey by Solomon Smith Barney, Citibank, and MORI, the preeminent British polling firm, showed 58 percent of the population against euro membership and only 27 percent in favor. Recently, in the wake of the Anglo-French beef dispute, the numbers have gotten even worse for advocates of euro membership. A December 1999 survey shows that support for the single currency has slumped to a record low of 17 percent. Nor is even remaining in the European Union beyond question. Another MORI poll of May 1999 indicated that 47 percent of those with a definite opinion wanted Britain to withdraw from the EU altogether.

Despite these figures, the Labour Party platform has committed the government to call for a referendum on the euro in the life of the next parliament. Assuming the Conservatives campaign for a "no" vote in a euro referendum, however well they put their argument, however skillfully they deconstruct the "yes" case, their task is an essentially destructive rather than a creative one. This is a charge that has dogged conservatism in both the U.S. and UK since the glory days of Reagan and Thatcher; one knows what conservatives are against, but what are they for? This damning question is invariably what Labour is bound to ask in the upcoming British referendum. Silence is not an effective answer, either politically or intellectually.

My proposal is that, as an alternative to Prime Minister Blair's "third way" push for ever closer integration with Europe, we should rally round a rival standard: Britain's entry into the North American Free Trade Agreement (NAFTA) as an Associate member. Such a plan requires the UK to shift its politico-economic focus from Europe and, instead, return its gaze to what is clearly the most successful partnership of the 20th century--the special relationship between the UK and the U.S. of Hamilton and Washington. Broadening NAFTA represents the kind of international institution we conservatives ought to favor: a coalition determined to genuinely maximize trade liberalization throughout our member states.

THE AMERICAN CASE FOR NAFTA ENLARGEMENT

Beyond providing the British with a compelling political alternative to euro membership, there are several general reasons such an association makes sense from an American point of view. First, the U.S. is already deeply enmeshed commercially with Britain; further trade liberalization would result in immediate and significant benefits for the American economy. Over the last 10 years UK net direct investment in North America has been greater than double its investment in the EU. Direct net investment in the UK from the U.S. and Canada has been 1.5 times the figure of total EU investment in Britain. In 1997 British direct investment in the U.S. was $18.3 billion, greater than any other country's, and 30 percent of the total of all foreign direct investment in the U.S. America invested more in Britain than anywhere else--$22.4 billion, or 20 percent of the total of all U.S. foreign direct investment. Also, Sterling has tended to be more in line with the dollar than with the D-mark and the other European currencies. This greatly affects interest-rate harmonization, leading to the inescapable conclusion that the American and British economies are more in-sync with one another than either is with the economic powers on the Continent.

The changed nature of the post-Cold War era itself has made a significant U.S.-UK economic link possible. Sharing borders, as the UK does with the Continent, does not necessarily translate into increased financial interactions compared with trade with a country far away, as it has done throughout history. This is the result of the telecommunications revolution that is such a salient characteristic of the age of globalization. To some extent the Internet has epitomized this "death of distance." The centrality of a U.S.-UK trade link would not have worked nearly so well in the age of the sailing ship, or even when the Treaty of Rome was signed in 1957. But globalization has made such a link very possible as the above economic figures indicate.

Second, the U.S. and the UK share a common politico-economic culture; this makes a trade combination between them far more likely to prove economically successful. In the era of globalization, the world can best be assessed as divided into two camps, exhibiting markedly different strains of capitalism: Statists and Reaganite/Thatcherites, with advocates of the third way vainly trying to square the circle of finding a coherent middle way between the two. Germany and France, with their reliance on a massive role for the state in their economies, lavish tax and benefits systems, structurally high unemployment (U.S. unemployment is less than half that of France, Italy, Spain, and Germany), and greater tendency toward protectionism, are clearly statist in politico-economic culture. A most curious phenomenon is that all the major parties in both France and Germany share a common loyalty to the social-democratic model. This is not the case in the UK; Prime Minister Tony Blair has done little to overturn the effects of the Thatcher revolution relating to privatization, deregulation, and a more market-oriented approach. It is simply a fact of life that continental Europe is largely statist and that this politico-economic orientation is increasingly incompatible with the Anglo-Saxon form of capitalism. Any historical look at the UK's long-evidenced frustrations with the EU illustrates the difficulties of unlike forms of capitalism banding together. The U.S. and the UK exhibit an anti-statist, pro-free trade, pro-markets politico-economic culture; sharing a common school of thought makes a trade combination infinitely more likely to be successful and is a strong argument in favor of the new NAFTA combination.

An expanding, free-trade oriented NAFTA would have a great competitive economic advantage over the EU due to this shared politico-economic culture. The English-speaking peoples' anti-statist cultural model, stressing the centrality of the rule of law, relatively lower tax rates, and less social spending, is the principal reason that, over the past 15 years, the U.S. and Canada have created 2 million more new jobs than the EU countries. Dismally, the EU has run a net loss of private sector jobs in the 1990s. The EU has a more corporatist approach, wants a larger role for the state in the marketplace, a padded safety net and, correspondingly, espouses a greater advocacy of protectionist doctrines to shield these inefficient practices. The Anglo-American economic culture exhibits a greater advocacy of free trade, a more dynamic economic environment, and a limited safety net. Such a grouping will inevitably fare better in the new era, driven as it is by markets and economic fundamentals. In terms of politico-economic culture in the age of globalization (to say nothing of the advantage a common language bestows), a free trade area centered around an Anglo-American nexus is simply a better fit for both countries than any conceivable alternate economic arrangements.

Third, the grouping will also protect the U.S. politically from whatever the outcome of the European experiment in supranationalism. I wish to make it clear that I am not against Europe; I am against a protectionist Euro-Federal grouping. We need to be as clear-eyed about this as the French and Germans are. They have no trouble reconciling the ambiguity that the U.S. is both an ally and a rival of theirs; such are the complexities of the world. There is a danger for the U.S. if the EU proves to be too successful in its attempts at centralization. If it succeeds in becoming some sort of coherent federal structure, it may well try to sever the transatlantic link--as Henry Kissinger has suggested2 --even attempting to become a rival hegemon in the long term. This is fundamentally not in America's interests. There is little doubt that such a goal is the object of many European centralizers. Georges-Marc Benamou, in Le Dernier Mitterand, has the elderly French President saying, "France does not know it, but we are at war with America. Yes, a permanent war, a vital war, a war without death. Yes, they are very hard the Americans, they are voracious, they want undivided power over the world."3 Likewise Gerhard Schroeder, in a television interview on December 28, 1999, said, "Whining about US dominance does not help, we have to act." He then went on to advocate that Europe act more like a single country if it wants to challenge U.S. economic and political dominance.4 As the preponderant power in the world, it is precisely such a challenge, from however seemingly benign a source, that America must counter. Nor is there a genuine teleological argument here; there is no doubt that a major strain of Euro-federalism is anti-American in its thrust. We need to stop thinking that French rhetoric isn't serious, that it's just a cultural eccentricity. Rather, it reflects the honest beliefs of a people that have a very different political and economic agenda from ours. Britain will not play a decisive role in what becomes of the EU (as always, that will be left to Germany and France), but it can play a critical role in assuring that an American-led bloc will maintain its dominance by a wide margin over such an integrated statist rival.

THE WAY AHEAD

The political way ahead for this revolutionary new trade nexus is straightforward. After campaigning for the euro option in the context of a referendum early in the life of the next parliament and losing, the Blair government will either fall or be gravely weakened, as it is so closely associated with entry into the Euro-zone. Either with a desperately weakened Blair or, better yet, a Tory government flush with triumph after winning the referendum, Britain's entry into NAFTA becomes the logical policy alternative. Britain, in line with the current Conservative position, should attempt to renegotiate the Treaty of Rome, allowing it opt-outs over all pieces of legislation relating to further losses of sovereignty and the ability to enter into negotiations to join NAFTA as an Associate member. Unlike others who advocate a closer Anglo-American trade link, however, I believe such talks, while desirable from a British point of view, are bound to fail. As Geoffrey Martin, the European Commission's representative in London stated, "The Conservative Approach is detached from the real circumstances of the EU."5 He pointed out that the trend in the EU was to extend its remit; I take him at his word. The EU
will go forward with an ever closer union whatever Britain decides to do. It is precisely because of these differences over Europe that the UK is looking for an alternative to euro membership in the first place. In such a situation the UK may well find it necessary to leave the union.

If negotiations fail (as is likely), Britain should then reenter the European Free Trade Area (EFTA), also joining the European Economic Area (EEA) along with Norway, Iceland, and Liechtenstein, which is the linking of the single markets of the EU and willing EFTA members, excepting matters relating to the Common Agricultural Policy and fisheries.6 Such a link would preserve British sovereignty (a vital political concern), keep the UK in the single market, while allowing it to negotiate Associate NAFTA status. EEA membership entails no transfer of legislative power from the parliaments of contracting parties to EEA institutions. Decisions by the EEA joint committee (composed of EU and EEA members) in principle need to be transposed into national legislation to be binding in each EFTA country. This would be the best-case scenario for Britain in the age of globalization; remaining in the common market while joining an expanding, free trade-oriented NAFTA would amount to having
its cake and eating it too. However, if the other member states of the EU refuse to allow for such a variable-speed Europe, a fundamental choice must then be made. Britain should then withdraw from negotiations with Brussels and enter the NAFTA free trade area as an Associate member.

NAFTA countries are already engaging in preliminary talks with EFTA states about Associate member status, along with Chile. Such a revamped NAFTA, rechristened and transformed into a global Free Trade Association (FTA), will be founded around a genuine commitment to increasing free trade between its member states and at a global level. It will serve as a practical advertisement for the enduring global benefits of free trade; an example all the more important in the wake of the Seattle debacle. It could come to encompass such countries as New Zealand, Hong Kong, Bahrain, Ireland, Chile, Singapore, Israel, Denmark, Estonia, and the Czech Republic. The Free Trade Association will be an inclusive grouping, whose expanded membership should be based solely on a policy commitment by its member states to a genuinely liberal global trading order. This commitment will be characterized by a state meeting certain numerical targets (such as those used in the methodology employed in The Heritage Foundation's Index of Economic Freedom) regarding a country's openness relating to its trade policy, capital flows and investment, property rights, and low level of regulation. Members will thus select themselves based on their genuine commitment to a liberal trading order. The plan embraces a commitment to a state's sovereignty; its economic policies (and the choices they represent) will determine whether or not it qualifies for the grouping. However, given my firm belief in the economic superiority of the Anglo-American economic model, such an organization will have a disproportionate number of English-speaking members, certainly in the short- and medium-term. However, the numerical target concept allows for self-selection, giving the whole project an inclusivity it would otherwise lack, while advancing our common desire to strengthen the ties that bind the English-speaking world together. The Free Trade Association's internal initiatives will include: freer movement of capital within the new grouping; establishing common accounting standards; setting uniform numerically driven very low rates of subsidy, as well as diminishing overt and hidden tariffs.

This new Anglo-American economic tie will simply build upon the older links that have made this relationship one of the most fruitful and enduring in history. This plan exemplifies conservatism at its Burkean best, proposing policies based on conditions that already exist, rather than as with the EU, trying to legislate sand castles into reality. For an indication of the vibrancy of the Anglo-American tie lies in its duration. As Winston Churchill observed during the Battle of Britain, August 20, 1940: "The British Empire and the United States will have to be somewhat mixed up together in some of their affairs for mutual and general advantage. For my own part, looking out across the future, I do not view the process with any misgivings. I could not stop it if I wished; no one can stop it. Like the Mississippi it just keeps rolling along. Let it roll. Let it roll on full flood, inexorable, irresistible, benignant, to broader lands and better days." Let us heed this hallowed voice, preserving and enhancing this vital link, which has seen us through so much in the past and can be a source of so much in the future.

John C. Hulsman, Ph.D., is Senior European Policy Analyst in the Kathryn and Shelby Cullom Davis Institute for International Studies at The Heritage Foundation.


1. The Euro-zone consists of the 11 European countries that have initially adopted the euro as their currency (Germany, France, Belgium, The Netherlands, Spain, Italy, Finland, Ireland, Luxembourg, Portugal, and Austria). The euro will become the sole legal tender in these participating countries by July 1, 2002.

2. Conrad Black, "Britain's Atlantic Option--and America's Stake," National Interest, No. 55 (Spring 1999), pp. 21-22.

3. Ibid., p. 22.

4. "Schroeder to Europe: Unite vs. US," Associated Press, December 28, 1999.

5. Robert Preston, "Opposition Party Commits to Altering EU Treaty," Financial Times, October 6, 1999.

6. Black, "Britain's Atlantic Option--and America's Stake," p. 18.

About the Author

John Hulsman Senior Research Fellow

Related Issues: Trade, Economic Freedom