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So what NAFTA then?

A week ago a hapless shadow front bencher spoke about the debate on our relationship with Europe that would follow our decision to stay out of the Euro- a decision that now seems a foregone conclusion for reasons well-known to Telegraph readers. Poor honest Howard Flight was understandably slapped down by William Hague, fresh from his triumphant slogan 'In Europe Not Run by Europe'- a masterly summary of the currently logical strategy towards a continent that we must hope sorts itself out for the world of services and the internet.

But Mr. Flight was right. The issue will not lie down. Now Senator Phil Gramm of Texas, chairman of the US Senate's powerful Banking Committee, is about to embarass both Her Majesty's government and her loyal opposition by trying to start hearings on whether the UK should be invited to join the North American Free Trade Area, NAFTA. No doubt our Embassy in Washington is now in overdrive trying to discourage them as 'unhelpful'- take absolutely no notice Senator, we Brits are quite grown up really.

At present the inertia factor makes any such ideas long-odds outsiders- for the present we must and will try to make Europe work in the hope that it will emerge blinking into a twenty-first century of truly free world trade. But who can be sure what the continent or indeed the world will do? The crystal ball is cloudy. We must therefore think about alternatives to our being endlessly integrated into an EU that might not be to our liking.

One alternative is to stay as we are- with an EU that for us remains 'variable geometry' even if some decide to tie the knots tighter. Another alternative is to go it alone, a free trading nation apart from all blocks, like a Switzerland or a New Zealand- with whatever treaties, political or economic that suit us. And then there is NAFTA.

NAFTA, as a free trade area, is in some respects like the EU 'customs union'. NAFTA aims to allow free movement of goods and services, mutual respect for intellectual property rights (no pirating of software etc), mutual access to government contracts and free movement of capital (but not people). But unlike a customs union, it does not attempt to force all members' tariffs or other trade barriers such as anti-dumping duties to be the same. Also, it stops well short of the EU's 'single market' and free movement of people.

The biggest tension in setting up NAFTA was over cheap Mexican labour. Ross Perot famously campaigned for the US presidency against the agreement, claiming to hear a 'giant sucking sound' coming from Mexico's direction- that of US jobs and industries being swallowed up by low-wage competition. In reaction to this Bill Clinton brought in 'supplemental agreeements' on labour standards and import surges: the first involves some pressure on Mexico to apply minimum wages and working conditions, the second triggers protection if imports suddenly threaten an industry. However, in practice these fears have been allayed by US full employment; manufacturing of the low-wage sort has gone on falling but jobs have replaced them in services. Any American who wants a job today can get one at once; the computer is being used desperately to economise on workers of all sorts and its threat is also keeping wage costs down, in an unfamiliar equilibrium.

From our point of view therefore NAFTA has big attractions over the EU customs union. NAFTA and the US has let market forces largely take their course in the decline of manufacturing- the main exception is steel, about the only heavily-unionised industry left in the US; but then steel is even more protected in the EU. Furthermore US agriculture is much less protected than EU agriculture, largely because it is so much more efficient; and this protection is given directly by the country's own taxpayers and not by price-fixing as in the EU where food is part of the customs union. If we joined NAFTA therefore both our food and manufactures prices would decline sharply, a huge gain to our consumers. Because we are large net importers of both, this consumer gain would not nearly be offset by the loss to our domestic producers.

There is more to it than just these gains. On the crucial industrial investment inputs of computers and software we pay something like 50% more in the EU than we would in NAFTA because of the EU protection given to the lagging EU producers such as Philips. In the USA 40% of investment today is in computers as it will soon be here. So we are taxing our own cost base heavily inside the EU, especially in computer-intensive industries. Since these are the fastest-growing ones today this twisting of our comparative advantage reduces growth and slows job-creation.

As for economic policies within NAFTA, there would be no social charter US-style, no tax harmonisation, no worries about being asked to bail-out insolvent partner countries with unaffordable state pensions. True, the EU offers free movement of people and the single market; but there is little

migration in Europe and the single market has proved a recipe for excessive regulation. In any case joining NAFTA would not stop us doing what we want with the EU.

Herein lies the beauty of NAFTA: its permissiveness in external relations. Our present EU membership prevents our joining NAFTA because it would violate the EU customs union by letting NAFTA products into the UK free of tariffs and other restrictions. But NAFTA members would not interfere, subject to free trade with them, as we renegotiated our relationship with the EU- witness Canada's current negotiations to join the European Free Trade Area as well.

NAFTA is therefore a gradualist route to general free trade- our best option. Now that our economy is competitive and (nearly) fully-employed again we need have no fear that the competition of world markets will give us a nasty unemployment headache; we can happily let market forces push us to where we get best value from our fully employed workforce.

If free trade in one giant step is too much for us, then NAFTA offers us free trade in easy stages; it is certainly too good to ignore.

Patrick Minford is professor of economics at Cardiff Business School and visiting professor at Liverpool University.
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