The term "trade war" is very misleading. It implies hostilities that hurt the other side, and a victory that benefits the winning side. This is, of course, nearly the opposite of the truth. A trade war cannot be compared to the events last year in the Persian Gulf. Instead, it is as if I tried persuading you not to slash your wrists by threatening to slash my own. If my threat persuades you, we both gain. If it fails, and I go ahead with it, we both lose.

THE FOLLY OF PROTECTIONISM

It really is absurd to believe that international trade is a zero sum game. All the great economists, from Sir Dudley North to Milton Friedman, have refuted that falsehood. An exchange of goods and services between two countries confers advantages on both. By promoting greater specialisation, it allows for higher production and higher living standards. This proceeds most rapidly when there are no tariffs or other governmental barriers. But it continues to proceed if only one of the two countries practises free trade. That country still enjoys the benefit of cheap imports. Somehow or another - by whatever roudabout means - its exports still get through. Its citizens have every reason for telling their neighbours what fools they are - that protection may enrich a few special interest groups, never an entire nation. But its government has no good reason for threatening retaliation. The threat may be successful. Then again, it may not. And it is better in such matters to be grateful for half of something than to risk it for the whole.

Now, the policy of the United States is to threaten retaliation. This is not, I believe, in its true interest. That, as with every nation, would best be served by unilateral free trade. By keeping or imposing its own barriers as bargaining counters, it harms itself as surely as I might by gently stroking my wrist with a razor blade.

Such, at least, is my normal view of the matter. On economic grounds, I am fully convinced. But, as an Englishman, I do currently find reason for admitting a partial exception. American trade policy may be mistaken in the abstract. Even so, the firmness with which it has been pressed may be about to confer on me, together with everyone else living within the European Economic Community, a wonderfully solid benefit.

Allow me to explain.

THE EUROPEAN ECONOMIC COMMUNITY

The Community was founded in 1956 by six European nations - Belgium, France, Holland, Italy, Luxemburg and West Germany. There were three reasons for its founding. First, these nations had recently fought the most destructive war in history against each other. There had to be a guarantee of future peace. Second, there was the Soviet threat. Despite the most colossal American generosity, it was plain that Europe had to provide something for its own defence. Third, there was the desire to make Europe into a superpower in its own right. The means to each was thought to be economic integration.

Of course, the notion that Europe could ever adopt a single foreign policy remains as unlikely now as it has ever been. Economically, though, the Community was a success. Since 1973, it has been joined by Great Britain, Ireland, Denmark, Spain, Portugal and Greece. From the beginning of 1993, internal trade will have been completely liberalised. From that day, the borders between the historic nation states of Western Europe will have no more significance to the businessman and worker than the border between Oregon and California. A vast area, from Ulster to Crete, from the Canaries to the Oder, will have become a single market of 350 million people with a gross product of $5 trillion.

AGRICULTURAL PROTECTION

The only real problem is farming. The Common Agricultural Policy is, according to the Australian Bureau of Agricultural Economics, "the most comprehensive example of the management of agricultural markets in the Western world. It reflects a fundamental lack of confidence in unconstrained market forces to achieve the kinds of objectives that EC members would like to see". Designed by European politicians and civil servants who had lived through the near starvation years of the 1940s, its purpose is to ensure a permanent abundance of food. It seeks to achieve this in three ways:

* First, the Community sets intervention prices each year for all agricultural produce. At these prices, it will buy whatever is offered to it. Therefore, given enough will and money, no amount of over-production can ever cause prices to fall. Invariably, the intervention prices are above world prices.

* Second, foreign agricultural produce is subject to a combination of variable levies and import quotas. The market is so rigged that imports cannot undercut Community farmers.

* Third, export subsidies are paid to allow Community agricultural produce to be sold on the world market at world prices without loss.

These policies cover more than 70 per cent of Community agricultural production - most grains and meats, milk, fish, table wine, and many fruits and vegetables. Their effect has been entirely predictable. A guaranteed market at guaranteed high prices has led European farmers to produce to the point where fantastic supluses have accumulated. There are "butter mountains" and "wine lakes". When the stores overflow, the food is destroyed. Milk is poured down mine shafts. Oranges are thrown into the sea. Otherwise, the food is dumped on the world market at whatever price can dispose of it.

REASONS FOR AMERICAN TOUGHNESS

The American case is simple. Take the example of grains. 30 years ago, the Community was the world's largest importer, buying about 20 million tonnes annually - mostly from North America. Today, because of the Common Agricultural Policy, it exports about 30 million tonnes annually. As an exporter, it now stands second, behind only the United States. These exports have gone to markets previously dominated by North America. To North Africa, for example, Community exports of wheat rose from a 2 per cent share of the market in 1977 to 42 per cent in 1980.

As a result of these changes, American farmers have conspicuously suffered. Their real incomes declined during much of the 1980s. Foreclosures and bankruptcies increased. This might have been found more tolerable had it been due to honest competition. But American agriculture is the best in the world: it need fear no honest competitor. The losses were due mainly to the deliberate policy of a foreign trading bloc.

It was with this in mind that the United States Government entered the current round of GATT talks "to achieve greater liberalization of trade in agriculture and bring all measures affecting import access and export competition under strengthened and more operationally effective GATT rules and disciplines". It proposed an eventual elimination of all distorting subsidies, and for the conversion of all variable levies and quotas into fixed tariffs. These are more easily perceived, and so are more easily reduced.

These proposals were rejected by the Community. The British Government, believing in free trade, was in favour of accepting them. But there were too many Continental farmers who would suffer from a reduction of their subsidies for the other governments to agree. The talks broke down at the end of 1990, and the world looked set for a collapse into protectionism, as the United Stated threatened retaliation.

This threat appears to have worked. Like the weaker party in a game of chicken, the Community has swerved away at the last minute. Fearing a trade was with the richest country in the world, it has returned to the negotiating table, willing to make concessions. All talk at the moment is of how best to liberalise the market in agricultural produce.

And I, who live in the Community, am delighted. The return to the table has been greeted on both sides of the Atlantic as a victory for the United States and a defeat for Europe. In fact, if agricultural trade is liberalised, it will in the short run do harm to the American consumer. The real beneficiary will be the European consumer.

IS TOUGHNESS GOOD FOR AMERICA?

What has the American consumer to gain from a successful conclusion to the GATT negotiations? Much in the long term, certainly. More trade leads to higher living standards. But, in the short term, they will face higher food costs. At the moment, by dumping so much on the world market, the Common Agricultural Policy tends to depress international prices. American farmers must find buyers for the 20 million tonnes of grain that they can no longer sell in Europe. Additionally, they must find buyers for the grain that they can no longer sell in North Africa. In effect, they must cut their prices.

This is hard for American farmers. But they amount to a minority of the population. City dwellers, and everyone else who is a net buyer of agricultural produce, have good reason to be grateful to the Community. Every New Yorker who buys a hamburger receives an indirect subsidy. After Marshall aid and 40 years of defending Europe from Communist aggression, the American taxpayer is at last being repaid.

TOUGHNESS IS GOOD FOR EUROPE

No, the main victims of the Common Agricultural Policy live in Europe. Here, the urban majority is weighed down with a double burden.

First and most noticeably, there are food prices significantly - indeed, often wildly - above world levels. Take the example of grains again. The intervention price for wheat is based each year on the market price at Ormes in France, at the centre of the Community's largest grain producing region. The variable levy on imports is then set at this price, plus the cost of transport from Ormes to the farthest part of the Community. In 1987, the European harvest failed, and prices more than doubled. For all the influence they were allowed on the price of bread, the North American prairies might still have been populated by Indians and wild buffalo. In the autumn of that year, wheat was unloaded at Liverpool at about $150 per US ton. Once the variable levy had been applied, it went on the domestic market at more than $250 per US ton.

In the 1840s, Cobden and Bright toured England, denouncing the corn laws as the most hateful tax that was ever imagined. Yet, bad as they were, the corn laws incorporated a sliding scale. As English prices rose, the duty on imports fell; until, after a certain point, all foreign corn entered free of duty. Under the Common Agricultural Policy, as prices rise, the duty rises. Membership of the Community has imposed on my country a protectionist trading policy that would have made the most extreme anti-Cobdenite of 150 years ago throw up his hands in horror.

The story is repeated with other foods. Under free trade, after allowance for transport costs and revenue taxes, comparable goods should sell anywhere in the world at comparable prices. While shopping the other day in London, I recorded the following prices: 5 large oranges, $2; 1lb lean steak, $16; 1lb Columbian coffee, $6; 2 dozen eggs, $2; 11lb potatoes, $4. And it must be borne in mind that, even against the United States, England probably has a comparative advantage in eggs and potatoes; and there is as yet no value added tax on food.

Second, there is the cost to the taxpayers of storing what cannot be sold, and of destroying or subsidising for export what cannot be stored. Already scandalously large in the 1970s, this cost soared during the 1980s. In 1985, the Community spent more than $15 billion on agricultural support. In 1989, it spent more than $30 billion. That is a lot of money. It is more than seven times the Jordanian GNP. It would keep everyone in India comfortably fed for a month. If it were not raised and spent, the average household in the Community would be $300 a year better off.

Then there is the less quantifiable harm. The subsidies have kept farming sectors throughout the Community far larger and more profitable than they would otherwise be. Capital and labour have been diverted from more effective uses. Within the farming sectors, there are distortions, as particular levels of subsidy have favoured one variety of produce over another. There is the superfluous warehousing and transport. There is the large and elaborate bureucracy needed to run the system. There are the private brokerage firms set up to guide farmers and wholesalers to the full range of subsidies available.

AN ECOLOGICAL CASE FOR FREE TRADE

I cannot ignore the environmental harm. Before 1973, the English countryside was owned for the most part by gentleman farmers and landlords to whom agricultural free trade gave no reason for intensive exploitation. Much of the land was left attractively idle. Since then, it has been turned into one vast agro-chemical laboratory. Marginal land has been ploughed. The hedgerows have been torn up, the fields merged one into the other. Fertilisers, the eventual effects of which we do not know, have been sprayed everywhere. The independent small freeholder, already scarce, is becoming extinct. It would normally be none of my business to complain about these transformations. But I have been compelled to help pay for them. Undeniably, that gives me every right to complain.

A EUROPEAN THANKS AMERICA

There is little hope that the Common Agricultural Policy will ever be reformed as a result of internal pressure. It is unpopular in Great Britain. Margaret Thatcher spent much of her time at the various European summits in trying to talk a little sense into her fellow heads of government. A few times, she even refused to hand over the British contribution to the Community budget. But Great Britain is only one member state among 11; and Margaret Thatcher has been replaced by the less assertive John Major. The other member states are so used to agricultural intervention, and so dominated by their farming lobbies, that they will never of their own choice dismantle a system that, for all its faults, does ensure plenty.

The only force that will bring about change is American pressure. Threats of steel quotas and punitive duties on fabrics - only these have made the European politicians sit up and think about cutting agricultural support. Only firm and continued pressure of this sort will save the European consumer from a system that is socialist in every respect but the creation of scarcity.

I am instinctively pro-American. As such, I have no desire to see the United States harm its own best interests, As a liberal economist, I cringe every time I hear the words "trade war". But, where the GATT negotiations are concerned, my feelings are mixed. If unsuccessful, threats of retaliation will harm everyone. If successful, they will harm the American consumer in the short and medium term. But, on the present occasion, they may have brought a little more sense into my part of the world than there was before they were uttered. And so, not for the first time this century, we in Europe have good reason to "thank God for America".