Stephen King: Trade suffers a bumpy ride to a level playing field

Unilateral attempts to change the rules to suit national self-interest are unedifying
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Politics and economics always get rather jumbled up when the discussion moves beyond national borders. Our innate nationalism - all of us have it to some degree - gets in the way of sensible economic judgements. Accusations and counter-accusations abound, with the main casualties ultimately being truth and wisdom.

Most people argue in favour of a level playing field but it's never easy to say what, exactly, is meant by this term. Even in sport, defining a level playing field is not as easy as it seems. Of course, you'll always find those who are willing to bend the rules. Most obviously, major sporting events are still haunted by drug scandals. But while it may be easy enough to exclude those competitors who are caught indulging in nefarious activities, it would still be difficult to argue that there really is a level playing field. Take the medal tally at the Commonwealth Games. As I was writing this piece, Australia, with a population of 20 million people, was top, having won 221 medals, of which 84 were gold. India, with a population of 1.1 billion, had won 50 medals, of which 22 were gold. Nigeria, with a population of 128 million, had won 17 medals, of which 4 were gold.

I'm now going to make the obviously false assumption that no competitor can win more than one medal. By doing so, however, I can calculate the chances, according to nationality, of a place on the winners' podium. An Australian is four times more likely to win a medal than someone from Britain (for the purposes of this comparison, I added together the separate contributions from the home nations). All that sun and surf down under presumably helps a bit. An Australian is 84 times more likely to win a medal than a Nigerian and 243 times more likely than an Indian.

Does this reflect some strange anatomical advantage that Australians have over the rest of mankind? Perhaps, but more likely are differences in economic and geographical circumstances. The richer you are, the more chance you have of winning a medal. Latest estimates suggest that Australians and the British enjoy incomes per head 10 times higher than Indians and 30 times higher than Nigerians (it's worth noting that the best sporting nation in the Commonwealth, after adjusting for income per head, is Jamaica). Sporting rules may help to define level playing fields, but there are some things that even the most assiduous of rule-setters can't correct for.

An obvious challenge in designing a level playing field, therefore, lies not with the establishment of rules that are applied to all in equal measure but in ensuring that those rules cover enough ground for people playing by the rules to believe that they are being fairly treated. A second challenge lies in reaching agreement on the objectives that the rules are supposed to protect. That's easy enough when it comes to sport - there's only one way of winning the 100 metres sprint - but it's a lot more difficult when it comes to international economic issues.

National self-interest dominates these international discussions, sometimes amusingly so. President Chirac's decision to storm out of last week's EU summit because Ernest-Antoine Seillière, the head of UNICE, Europe's industrial federation, had the temerity to address the assembled audience in English is one trivial example of the perceived loss of national identity associated with the search for international agreements (President Chirac should at least be able to console himself with the knowledge that UNICE stands for Union des Industries de la Communauté Européenne and that UNICE's website is published in both English and French).

National self-interest can, however, lead to blinkered outcomes that make life worse. The problem arises not only because the self-interests of individual countries can contradict one another, but also because each country has a view not only about its own behaviour, but also about the appropriate behaviour of others.

The classic academic argument dealing with this problem is Amartya Sen's "The Impossibility of a Paretian Liberal", and it sums up President Chirac's problem rather well. Imagine that Chirac prefers no one to speak in English at EU summits. Imagine also that, if Chirac is to allow anyone is to speak English, it's Chirac himself, if only to tell everyone else to speak in French. Imagine, too, that Ernest-Antoine Seillière wants to speak in English, but would get even greater pleasure from seeing Chirac speaking, uncomfortably, in English.

A libertarian would argue that Ernest-Antoine should be free to speak in whatever language he prefers, and that Chirac's views should simply be ignored. A Pareto optimiser - a utilitarian who's happy when no one can be made better off without making someone else worse off - would argue that Chirac should be the English speaker, because both Chirac and Ernest-Antoine prefer that outcome.

In other words, free choice and Pareto optimality - in economic terms, efficient resource allocation - don't always sit together terribly well, despite the claims of many a free market exponent. It's no surprise, therefore, that countries often cannot agree on the best way forward and certainly cannot agree on what's meant by a level playing field.

In the areas of international trade and capital flows, this really matters. Disagreements arise because countries' libertarian and economic instincts diverge, leading to differences of view about the important defining features of national sovereignty. For Tony Blair, sovereignty is a very loose concept. Last week, he noted that "the electricity in Number 10 Downing Street is supplied by a French company, the water by a German company. On gas, you've got a choice of four companies, three of which are non-British".

Jacques Chirac has a different view: the proposed takeover of Suez (the Franco-Belgian utility) by Enel, the Italian operator, is wholly undesirable because Enel is "under the total control of the Italian government" and a takeover would be "contrary to the interest of the shareholders and states of France and Belgium". And there, in a nutshell, the difference is revealed. Blair believes that the national interest is served by allowing shareholders free choice, even if that choice is, from time to time, uncomfortable for the government of the day. Chirac believes, instead, that shareholders should somehow serve the national interest, as defined by the government of the day.

Unilateral attempts to change the rules of the game to suit national self-interest are an unedifying spectacle, but all countries do it from time to time. Leaders may deny the protectionist charge but a failure to go through multinational channels - whether they be under the auspices of the European Commission, the World Trade Organisation or countless others - suggests that there's too much playing to the domestic gallery going on. As soon as that happens, protectionism becomes a much more likely outcome because the institutions designed to promote free trade and capital movements are undermined, even if individual politicians are merely responding to their democratic exigencies back at home. It's a bit like Australia ignoring the Commonwealth games and, instead, choosing to stage a sporting event open only to Australians: many more gold medals, no doubt, but, competitively, a sterile occasion.

Stephen King is managing director of economics at HSBC