Red Tape Stifles Free Trade by the Back Door

If you are the sort who thinks that the free movement of goods, capital and people enriches all the world's nations, you are probably worried because the Doha round of trade talks is on life support, and the plug is about to be pulled. And you can't be happy that the EU has decided to load tariffs on inexpensive, Chinese-made shoes, even though EC trade commissioner Peter Mandelson's proposal that they stay in place for five years has been pared to a mere two.

And if you are the sort who worries when another nation's laws seem to take precedence over your own, and affect the business community, you can't be happy that some loony magistrate in, say, Spain, can issue an arrest warrant for a British citizen, and have him whisked off to jail without an extradition hearing.

Or that American cops can feel the collar of a respected British businessman when he lands at Kennedy airport to attend a meeting of a company engaged in perfectly legal activities.

The bad news is that there is a lot more to worry about than you might think, as the markets realised when American lawmakers attached to the Safe Ports bill a provision that will bar the 12m American online betters from using credit cards, bank cheques and electronic fund transfers. That, in effect, ends internet gambling in America, and wiped £ 4billion off the value of an industry that started the day worth an estimated £6 billion.

The decision by the US Congress and President George Bush to appease the social conservatives who see gambling as evil knocked £ 2.5billion off the share price of Party Gaming, the industry leader that counted on American punters for about 80% of its revenues. Other British companies also felt the impact of the American decision: the market value of Sportingbet fell almost £ 500m, forcing it to call off merger talks with World Gaming.

As Robert Cole pointed out in The Times: "If online gaming is outlawed simply because it is distasteful to a certain breed of regulator, it will create fear that other enterprises will be banned for illogical or spurious reasons."

That fear is already more than justified, and not only in the case of gambling.

The process of passing national laws that affect foreign companies is widespread.

The Chinese have a variety of ways of restricting the activities of Google, Yahoo and other such firms, restraining trade every bit as much as if they told the World Trade Organisation (WTO) never to darken their nation's doorstep again.

The Russians, who are clamouring for admittance to the WTO on the grounds that theirs is a market economy eligible to sit at the table of free-trading nations, are using environmental regulations and national laws to wring concessions from international oil companies. Vladimir Putin's government contends that Total's licence to explore in the Arctic circle, and Royal Dutch Shell's contract to develop natural gas in Sakhalin, on an island in Russia's Far East, violate its environmental regulations, and that Exxon's contract in Sakhalin doesn't convey the rights the company believed it did. Besides, the terminal through which Exxon's oil would pass on its way to market suddenly seems to the safety inspectors less safe than when they approved it.

Only the churlish would contend that Putin is unhappy with these deals, signed when Boris Yeltsin was president, Russia was desperate for foreign investment, and oil was selling at less than $20 a barrel. No matter: they are yet another example of a country using its laws in a way that harms the companies of other nations - France (Total), the Netherlands (Shell) and America (Exxon).

Then there is the EU, probably the world's leading practitioner of the art of using national rules to stifle the activities of foreign companies while appearing to have no such object in mind. Last week the WTO finally made available to the public its 1,000-page report holding that the EU violated WTO rules by banning genetically modified (GM) products between 1998 and 2004. The EU knew this was coming, and so substituted a product-by-product review process for the general ban, which allows it to contend that it is testing the safety of each of the foods that Americans consume quite happily and with no ill effects.

US trade representative Susan Schwab points out that the EU has approved only a handful of biotech applications, and that some such applications "have been pending for 10 years or more and applications for many commercially important products continue to face unjustified, politically motivated delays". Indeed, Austria, Germany, France, Belgium, Italy and Luxembourg have gone further, and continue to ban even those GM crops that have been approved by the EU. What America's social conservatives have done to British gaming companies, and Russia's siloviki are doing to international oil companies, EU protectionists are trying to do to American farmers.

All of this means that there is more going on in world markets than we usually consider. Yes, China hurts European and American companies by keeping its currency undervalued. Yes, EU and US agricultural protectionism mightily affect farmers in poor countries. And yes, decisions by the Federal Reserve Board affect the value of the dollar and therefore the competitiveness and fortunes of companies the world over. In all of these and other cases, decisions by one country have profound effects on another.

But there is more to the story of international interdependence than most people realise. A nation's laws and regulations can have serious effects, some intended, some not, far beyond its own borders.

This article was originally published in the October 8, 2006, Sunday Times. (London)