Federalism and Free Trade

Protectionism has become less and less of a viable instrument of intervention by national governments, particularly for member-states of common markets. This Hobart Paper provides a formal framework for analysing the effect on domestic policy choices of constraining the power of national governments to maintain trade barriers, as experienced in GATT-type arrangements, in common-market treaties, and in other free-trade agreements within blocs of trading partners. The author argues that the government of a national economy with free inward and outward movement of factors and goods, has little or no power to engage in purely redistributive policies. The member governments of a common market are in a position approximating that of the government of a small economy, free of trade barriers. Federalism and free trade go hand in hand inasmuch as they both strengthen governments' power to do good, while restricting their power to abuse citizens. The paper attempts to show that the opening of national frontiers to freer movement of goods, services, capital, and people will result in less use of other instruments of intervention in domestic affairs.
Less reliance on protectionism by national governments will have an impact similar to reinforcing devolution of power within federal states. Imposing heavier taxes and restrictive regulations on national resources in conditions of free trade leads first to more rapid and more pronounced substitution of foreign for local production. It also causes capital to move out of higher-cost economies. Finally, victims of government abuse may 'vote with their feet' and leave the territory. Freer trade is a first step and a sufficient condition towards the federalisation of the world. However, this competitive federalist model only works if national and local decisions are not superseded by vast central powers covering the same fields within trade blocs or at the supra-national level. As a tool for cartelising national and regional governments, centralisation weakens the ability of citizens to escape unpopular measures by moving their goods or their production factors to more favourable locations and uses.