One of the key issues in the UK’s negotiation to leave the European Union will be whether it is possible for the country to retain access to the single market without accepting freedom of movement. But why do free movement and free trade go hand in hand? Charlie Cadywould explains why in practice there are several sound reasons for maintaining freedom of movement alongside free trade.
Retaining and completing the free movement of goods, services and capital between the UK and the rest of Europe, without the burden of free movement of people, has become the holy grail of British politics.
Some observers think this is within our grasp if we play our cards right in the upcoming negotiations with European leaders, while others think it’s a pipe dream – impossible to realise because neither the EU nor member state governments would accept any watering down of the four freedoms. A YouGov poll released last week suggests there is widespread public opposition across Europe even to a free trade agreement with Britain that does not include freedom of movement.
The four freedoms and the UK’s negotiation
The UK’s relationship with the single market has been debated extensively over the last few months. The same can be said of the costs and benefits (economic and otherwise) of free movement and immigration to Britain. What has been less discussed, but is worth considering in the current context, is the relationship between free movement of capital, goods and services, on the one hand, and freedom of movement on the other. Why, economically speaking, do these four freedoms go together?
The simplest answer to this question is that the free movement of capital, goods and services without free movement of people is bad for workers. Having free movement without the free movement of capital goods and services, however, would be bad for business and investment. A balance between the two is needed in order for markets to function properly. We can illustrate this using a few hypothetical scenarios, adapted from an argument made by Joseph Siglitz, which, although simplifications, demonstrate important directions of travel in both cases.
First, imagine a situation in which no worker is allowed to relocate to different countries for a new job, while companies could move at a moment’s notice, continuing to export to the country they’ve just left. Businesses would simply move to wherever wages were lowest, and carry the real threat of leaving should employees become too demanding with wages or conditions. Desperate to bring jobs back to their country, employees – whether organised or not – would have to lower their demands to the lowest possible subsistence level, and wages everywhere would be permanently supressed. This would generate a race to the bottom – great for those at the top, but terrible for everyone else.
The balance of power between employees and employers would be tipped all the way in favour of employers, and workers – whether unionised or not – would be in a difficult situation. Contrary to the common discourse, there is also evidence that labour mobility can help to push up wages overall. Of course, in cases where migration is particularly one-sided, wages might go down in certain localities, but the overall trend should be positive.
Second, imagine a situation where employees were free to move around with no restrictions from states, and with a high degree of willingness and a low cost to relocate for higher wages – near perfect labour mobility. At the same time, there are high tariffs on trade and capital flows are severely restricted. Workers would simply move to wherever wages were highest, and employers would have to keep raising wages to keep their employees from leaving.
This would be great for workers, and indeed Stiglitz leaves the argument here, claiming the reason we don’t have mobile labour without mobile capital is simply ‘that’s not the world we live in… partly because the one percent doesn’t want it to be that way’. But where would the incentive be for investment or taking a risk on starting a new business if any potential profits are squeezed to zero? Why would companies bother to improve their practices if they received no share of the benefits of productivity gains?
The threats of either party leaving need to be somewhat in balance in order to ensure the market functions properly. Of course, this could be achieved by closing borders and introducing import quotas and tariffs. But then you lose all the efficiency gains of trade (see Ricardo’s theory of comparative advantage), and you get a sub-optimal allocation of resources – including workplaces and suitable employees being poorly matched up. In order to gain these benefits, all four pieces of the puzzle (goods, services, capital and labour) need to be mobile. A market with severely restricted labour mobility is a rigged market, not a free market.
This isn’t a revolutionary insight by any stretch of the imagination, and of course these theoretical scenarios don’t capture the realities and subtleties – economic, political and social – of any particular case. But in our public discourse we appear to have come to the conclusion that free trade without free movement is the ideal outcome, whether we think it’s politically feasible or not. Whatever your political preferences, it’s worth remembering that the four freedoms are taken (or left) together for a reason.
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Note: This article gives the views of the author, and not the position of EUROPP – European Politics and Policy, nor of the London School of Economics. Photographs: Pexels / public domain.
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Charlie Cadywould – Demos
Charlie Cadywould is a Researcher at the think tank Demos.
If so (which i could agree with you) then we need a pause, extending UE has being a process that has created tension into the structure and around, we need a pause of a decade, no more countries, no more free trade agreements, let people breadth and modify internally what is required before moving on.
Europe has always created the reason to live, Europe invented Socialism, Communism, Capitalism, Liberalism, Human Rights, Feminism, etc. let´s understand what is coming (extintion of work, global warming, climate change, life extension, etc and then move on again.
Good article Mr. Cadywould, I enjoyed the lecture.
An interesting article. I have been trying to search for a logical, reasoned, economic answer to the free movement of people issue. I generally only see the ideological reasons from the EU around social integration which, if we’re honest, isn’t really working. People may move to a foreign country but few integrate, most live in areas that are full of people from their own country. It’s evident in the UK as well as other parts of the EU.
This article has come the closest to a reasoned arguement but I have an issue that you have been extreme in the options presented… NO movement is not necessarily the answer. We have the right, with most of the rest of the world, for workers who have secured jobs to move and the right for temporary visas (which can be used to obtain work) which while not fully solving the potential imbalance you mention does go a fair way. It seems to me that most of the debate has been extremely polarised. Equal right to work should not also mean equal right to live without work.
“Equal right to live without work” says Bob. Why not? Ok lets rephrase that “equal right to live without work or being a call on the social security budgets of the new country”? If a retiree wishes to move to another country, bringing with them funding for cover housing and income to live without falling into a poverty trap, and enough to pay for healthcare? A gain for the receiving country. But the article falls into the standard trap from the UK perspective over many years of focussing too much on seeing the EU as an economic construct only. All except one of the other 27 members has over the last 80 years suffered occupation, dictatorship, colonisation, civil war. All confined citizens within their country with limited or no access outside. The ability to move freely is a moral victory.
“…these theoretical scenarios don’t capture the realities and subtleties – economic, political and social – of any particular case. ”
and
“…Of course, in cases where migration is particularly one-sided, wages might go down in certain localities, …”
These variables account for most of the frustration felt by U.K. Communities that voted to leave the EU. The economic models of the 4 freedoms are fine in their theoretical function, but there must be a discussion and a rational explanation as to how the impact of free movement on a country like Britain can be mitigated, when it is one-sided, incomers generally don’t integrate and exploitative employers lower wages.
Jeremy Corbyn made an interesting policy intervention, in his Conference speech, when he said that a Labour Government WOULD mitigate the effects in hardest hit areas – but Labour may never be able to form a government and put that policy into effect.
Do we in the UK not have extenuating circumstances in terms of free movement? Would it not be much easier for a foreigner to live and work in the UK because English is the de facto universal language. The ‘friction’ of labour movement into the UK is relatively lower. I imagine this operates at all skill levels. I work in software and speak regularly, in English, with consultants from the Czech Republic. I assume that they are taught English from an early age. The chances that they would thrive if they moved to the UK are good. The chances that I would thrive if I moved to the Czech Republic are minuscule. Goods, Labour, Capital can move relatively easily, people cannot. People leave friends and lives behind. For a person, not knowing a language is a barrier to re-location; it can limit your economic effectiveness, hinder social integration and disadvantage you in economic negotiations. How is this effect taken into consideration in the theory of free movement (which, as described here pre-supposes zero friction)? Would this effect not depress wages in the UK and increase unemployment amongst the native population. The free movement of people principle seems flawed or ‘nuanced’ as another comment suggests.
These two scenarios appear to ignore supply and demand.
In the first scenario, where firms can move but not people and we imagine all firms moving towards the cheapest labour, then the labour in that country would become scarce and wages would rise.
In the second scenario, where people can move but not firms and we imagine workers moving towards the highest wages, then workers would become abundant in that country and wages would drop.
“But in our public discourse we appear to have come to the conclusion that free trade without free movement is the ideal outcome, whether we think it’s politically feasible or not.”
I think the author meant to say ‘free trade WITH free movement’ in the sentence above, if I’m not mistaken.
Hi!
Where am I able to find Siglitz’s original argument?
Thanks,
Daniel
It would be interesting to extend this argument further to current so called “free trade agreements”.
It all has to do how we approach growth and price we are willing to pay for it:i) global economic growth at the expense of rapid adjustment of local labour markets, ii) a balance between economic growth and more moderate adjustments of the local labour markets. If the 1% has their way, we all know that growth at any expense will always be the chosen option. In my view, only full mobility is able to achieve the balance of ii).
If the four freedoms are held dearly, why then is there free trade agreements with other distant countries that doesn’t include free movement of labour, say between Europe and Mexico?
When you say that free movement of goods, services and capital without labour is bad for workers, I think of China and the USA. American businesses have been relocating en-masse to China and exporting the goods back home, leaving many lower skilled American workers unable to find good jobs.
“If the four freedoms are held dearly, why then is there free trade agreements with other distant countries that doesn’t include free movement of labour, say between Europe and Mexico?”
Because a simple free trade agreement doesn’t give you the same level of access to trade in the EU’s market as membership of the single market does. Every state that has complete access to the single market (including non-EU countries like Norway and Switzerland) abide by the four freedoms. It’s that simple.
What seems to happen in the UK is there’s a huge amount of confusion about what a “free trade agreement” is. Brexiteers seem to think all free trade agreements are the same and that it makes no difference to your economy if you have some minimal agreement on tariffs with the EU rather than full access. That’s just a misunderstanding. If you want full access to the single market then you have to abide by the rules. If you want some partial access and some minor concessions then you don’t have to abide by all of the rules but you aren’t getting the same benefits.