Free Trade versus Fair Trade
Free trade refers to a general openness to exchange goods and
information between and among nations with few-to-no barriers-to-trade.
Fair trade refers to exchanges which meet the demands of fairness and
social justice.
Proponents of fair trade argue that exchanges between developed
nations and lesser developed countries (LDCs) occur along uneven terms,
and should be made more equitable with the emphasis being on social
responsibility, where careful consideration is given to how business
transactions will affect issues including natural resources, cultural
traditions, working conditions, worker income, and business
sustainability.
The Fair Trade Federation's Annual Report describes the fair trade
movement as "a global network of producers, traders, marketers,
advocates and consumers focused on building equitable trading
relationships between consumers and the world's most economically
disadvantaged artisans and farmers."
Fair trade organizations, such as the Fair Trade Federation and the
International Federation for Alternative Trade maintain that fair trade
practices alleviate poverty, enhance gender equity, improve working
conditions, the environment, and distributive justice.
By contrast, free trade proponents believe that under a system of
voluntary exchange, the demands of justice are met. Although free
traders hope to alleviate poverty and improve conditions around the
world, they prefer measures that are less intrusive than fair traders,
who regard the unfettered market as injurious to these same goals.
Free traders argue that in the long run markets will solve - that is,
when permitted to come to equilibrium, both rich and poor nations will
benefit. In this way, free traders hold that free trade is fair
trade.
The Case for Fair Trade
The Dependency Thesis
Proponents of fair trade maintain that trade between and among
nations occurs in coercive and uneven ways. Even if nations trade
freely, smaller nations become increasingly reliant on richer states,
whose interaction with smaller countries depletes natural resources in
those countries, and slows their progress. Dependency theory has many
variations, and has undergone changes over several decades.
| According to the
principles of fair trade, the prevailing terms of trade
between rich and poor nations are unjust because
prevailing market prices for the goods produced in the
Third World are too low for the laborers to reap a wage
reflecting their dignity. |
|
Here are the basics. Richer, powerful nations are
collectively known as the "core," while LDCs and other very
poor countries are known collectively as the "periphery."
Dependency theories entertain the idea that periphery states
depend for their well-being on the core. The core produces
more luxury goods, while the periphery specializes in basic
and industrial goods which contribute to the devastation of
the local economy and enviroment. Although there are many
putative mechanisms driving the dependency - some of them
highly disputed even among dependency theorists - the
general theme is that such a dependent relationship exists,
and is ruinous to the LDCs in both human and environmental
terms.
As a result of these trends, the gap between the rich and the poor has
increased dramatically in recent decades. Today, the richest 20% of the
world's population has 60 times the income of the poorest 20%. The
benefits of trade are similarly concentrated among the wealthiest
segments of the world's population and only a handful of developing
countries. For example, of the $102 billion in private investment that
went to developing countries between 1970 and 1992, 72% went to only 10
countries. Most of those ten were the emerging markets such as China,
Hong Kong Singapore, South Korea and Taiwan. Even in many countries that
are currently experiencing high growth rates from expanded trade, the
benefits of growth are not trickling down to the poor.
Dependency theory also hold that governments mismanage money, while
private investors regard the Third World as risky investment. So, the
Third World finds itself perpetually disadvantaged. John Gray of the
London School of Economics argues in False Dawn: The increased
interconnection of economic activity throughout the world accentuates
uneven development between different countries. It exaggerates the
dependency of ‘peripheral' developing states such as Mexico on
investment from economies nearer the ‘centre', such as the United
States. Though one consequence of a more globalized economy is to
overturn or weaken some hierarchical economic relationships between
states - between western countries and China, for example - at the same
time it strengthens some existing hierarchical relations and creates new
ones.
Dependency theory ultimately maintains that the terms of trade
between center and periphery nations is unbalanced and therefore unfair.
Alleviation of Poverty and Human Dignity
Fair trade advocates maintain that nations that have limited export
opportunities become poorer, and hard-working individuals and their
children struggle to meet basic life needs. Fairtrade.org argues that
trade introduces an exploitative mechanism which impoverishes those in
the Third World: "Particularly in the field of trade, our area of
attention, the law of the strongest is frequently the only law. In Asia,
Africa and Latin America, both male and female craftsmen and farmers
know all about this. If they cannot free themselves from the grasp of
the numerous middlemen and buyers, who from their position of power
prescribe the lowest prices, they will remain slaves of circumstances
their entire lives."
Around the world, production, trade and retailing of most goods and
services are increasingly concentrated under the control of a small
number of corporations. Economist John Cavanagh and Frederick Clairmonte
have calculated that just over a quarter of the world's production comes
from General Motors, Mitsubishi, Shell, Philip Morris and 200 of the
other largest firms. These firms are the primary beneficiaries of the
world's rapidly growing trade. As they compete with one another to
capture global markets, their primary mode of reducing costs has been
through cutting jobs, wages and benefits. Between 1979 and 1992, for
example, the Fortune 500 largest firms in the U.S. cut 4.4 million
workers from their payrolls globally to remain competitive and keep
profits high.
According to the principles of fair trade, the prevailing terms of
trade between rich and poor nations are unjust because prevailing market
prices for the goods produced in the Third World are too low for the
laborers to reap a wage reflecting their dignity.
Nobel Prize winning economist Amartya Sen, in Development as
Freedom notes another problem of poverty: Many of the same people
who have small incomes also have deficiencies in the ability to convert
those incomes to useful life pursuits. In other words, there are
"unequal advantages in converting incomes into capabilities." Sen
continues, "the interpersonal income inequality in the market outcomes
may tend to be magnified by this ‘coupling' of low incomes with
handicaps in the conversion of incomes to capabilities."
Poorer nations are thereby perpetually punished even further as they
are less able to efficiently use the income they accumulate. Fair trade
organizations take up the project of buying products from Third World
producers at supra-competitive prices - prices that exceed the
equilibrium price, as a form of poverty alleviation and as a reward to
socially responsible producers.
The Case for Free Trade
Voluntariness
Proponents of free trade argue that voluntary exchange meets the
demands of justice because each party to the trade leaves the trade
richer than he or she was before. Johan Norberg writes in his book In
Defense of Global Capitalism: It may seem odd that the world's
prosperity can be augmented by swapping things with each other, but
every time you go shopping you realize, subconsciously, how exchange
augments wealth. You pay a dollar for a bottle of milk because you would
rather have the milk than your dollar. The shop sells it at that price
because they would rather have your dollar than keep the milk. Both
parties are satisfied with the deal, otherwise it would never have taken
place. Both of you emerge from the transaction feeling that you have
made a good exchange, your needs have been provided for.
| Free marketers
regard the optimal use of resources as fair. That is
what they mean when they say that free trade is fair
trade. |
|
Advocates of free trade note that parties to a transaction
participate freely because it improves their own lot. This
lesson applies more generally to trade among nations. If
producers and consumers in world markets adopt the same
producing and consuming behaviors that they do as
individuals, then exchange among nations is just and wealth
increasing.
Other academics have focused on the connection between open exchange
and the larger program of freedoms in society. Nobel laureate Milton
Friedman argues in Capitalism and Freedom that there is a very
real connection between economic freedom and the political freedoms. In
this way, voluntary exchange is a component of a larger bundle of
freedoms in society. Friedman illustrates this view tellingly: No one
who buys bread knows whether the wheat from which it is made was grown
by a Communist or a Republican, by a constitutionalist or a Fascist...
Instead of recognizing that the existence of the market has protected
[the oppressed] from the attitudes of their fellow countrymen, [critics
of free trade] mistakenly attribute the residual discrimination to the
market.
Discrimination can therefore be a self-punishing choice for producers
- who select workers on the basis of something other than performance -
and for consumers, for whom it is costly to determine the often
anonymous sources of goods and services. Voluntariness permits incentive
structures that accord with fairness.
Trade Is Enriching - To Everyone
Advocates of free trade find many economists in their ranks;
economists nearly unanimously support measures to increase the flow of
goods between nations, and thereby to make trade freer.
Countries, like people, are more or less talented at producing
various goods.
When countries specialize in producing what they are relatively more
talented at producing, they can trade with other countries doing the
same thing, and all participating countries can enjoy a more extensive
package of total goods and services than they did before. Economists
call this the Ricardian trade model, and empirical evidence appears to
confirm trade's enriching effect on participating countries.
Consider two fictional countries: Here and There. Here and There each
have 10 units of Labor with which to produce cookie dough and chocolate
chips. Here and There fought some brutish wars many decades back, but
they have come to terms with each other by finding their common ground:
chocolate chip cookies.
Laborers in Here can produce cookie dough at a rate 10 units per hour
and can produce chocolate chips at a rate of 1 unit per hour. Over
There, where cocoa plants are abundant, Laborers produce chocolate chips
at 10 units per hour, but produce cookie dough at a disappointing pace
of 1 unit per hour. Let's see what happens when Here and There
stubbornly refuse to cooperate and make their own chocolate chip
cookies:
In Here, laborers are divided evenly between cookie dough and
chocolate chips. At the end of one hour, Here cookie dough producers
(five of them) each have made 10 units of cookie dough for a total of
50. The other five work on chocolate chips, and they can come up with
five units at the end of the hour. At the end of an eight-hour day,
there are 40 chocolate chips and 400 units of cookie dough. In There,
laborers are divided evenly. They end up with 400 chocolate chips and 40
units of cookie dough.
Chocolate chip cookies are best when they're three parts cookie dough
to one part chocolate chips. That means Here can make 120 chocolate chip
cookies before running out of chocolate chips to add to cookie dough,
and There can make approximately 13 chocolate chip cookies before
running out of cookie dough.
Of course, Here will have an excess 280 units of cookie dough, and
There will have an excess 387 chocolate chips, for a possible increase
of 93 chocolate chip cookies between Here and There per day. If they
trade, Here and There can both increase its number of chocolate chip
cookies. If they don't, those 93 extra chocolate chip cookies vanish as
surely as today will tomorrow.
This is hardly the strongest case that can be made to Here and There
to trade. Instead of domestically producing cookie dough and chocolate
chips and selling each other some of its excess, Here could fully employ
its workers in producing cookie dough, and There could fully employ its
workers at producing chocolate chips. When they "specialize" in what
they have a "comparative advantage" in (this is econ lingo for producing
what each country is least bad at producing), both countries can
increase their daily chocolate chip cookie intake.
Unless expanding a country's consumption opportunities is a bad
thing, free trade must be a good thing. Here will probably always have
more chocolate chip cookies than There as long as chocolate chip cookies
call for more cookie dough than chocolate chips. But There is not likely
to be upset; There unambiguously has more chocolate chip cookies than it
would under autarchy.
But what can we make of poverty in the meantime? Trade may be
enriching, but what does that mean for those that are poor and will
remain poor during this process.
Professor Deepak Lal is a pioneer in the field of development
economics. He remarks that "for most of history poverty has been the
natural state of Man." On the encouraging side though, Lal argues, "a
liberal economic order which promotes labor intensive growth can cure
the age long problem of structural mass poverty."
What Is Fair Trade Anyway?
Backed
by conventional economists, large corporations have convinced most of
the world's governments that they should maximize global competitiveness
through freer trade. Corporate and government officials often theorize
that free trade will be beneficial for workers, whose wages and benefits
can rise as foreign markets expand for their goods and for consumers who
can buy cheap foreign imports. Following this theory, new regional trade
agreements, like the North American Free Trade Agreement (NAFTA) and the
General Agreement on Tariffs and Trade (GATT) are reducing barriers to
trade and investment for firms.
Advocates of free trade sometimes oppose fair trade on the belief that
the concept is incoherent. Suppose that an initial "fair" price for a
company to pay workers could be agreed upon. But would the price (or
wage) be fairer if it was higher? If it was lower? If higher, workers
capturing the jobs at that wage would live better. If lower, more
workers could benefit from being paid that lower wage. What conditions
of fairness underlie the idea of a "fair" price?
University of Rochester economist Steven E. Landsburg, author of
The Armchair Economist and Slate.com columnist, writes the
following story which illustrates the problem of "fair" prices: My
dinner companion was passionate in her conviction that the rich pay less
than their fair share of taxes. I didn't understand what she meant by
"fair," so I asked a clarifying question: Suppose that Jack and Jill
draw equal amounts of water from a community well. Jack's income is
$10,000, of which he is taxed 10%, or $1,000, to support the well.
Jill's income is $100,000, of which she is taxed 5%, or $5,000, to
support the well. In which direction is that tax policy unfair?...I have
thought about the issue in those terms quite a bit and am still unsure
of my own answer. That's why I hesitate to pronounce judgment on the
fairness of tax policies. If I can't tell what's fair in a world with
two people and one well, how can I tell what's fair in a country with
250 million people and tens of thousands of government services.
Buyers and sellers self-select into and out of markets based upon
their preferences, their willingness-to-pay, and the costs of
production. When the market "clears," there is no excess demand or
excess supply, so no resources are put into storage and no resources are
still desired at the prevailing price. This outcome is efficient. Free
marketers regard this optimal use of resources as fair. That is what
they mean when they say that free trade is fair trade.
More importantly, if nations trade freely and therefore have no
grievances about the trade, on whose behalf do we find the trade unfair?
It would seem peculiar to find the trade objectionable because of
another party's disagreement, where that party was unaffected by this
trade.
Concluding Remarks
Fair traders and free traders have a surprising amount of common
ground. Both camps are concerned with global justice, both are concerned
with poverty alleviation and global prosperity. The basic problems
appear to be held in common. But free traders regard voluntariness as
the chief component of justice. Fair traders regard the expression of
human dignity as the chief component of justice.
Free traders believe the best way to alleviate poverty in the long
run is to permit freer trade while fair traders think that opening trade
even further would entrench trends of rich nations becoming richer and
poor nations becoming poorer. Fair traders think global prosperity
cannot forget to address the market failures of capitalism such as
externalities, asymetric information, and public goods and meet the
immediate needs of those in the least well off group, while free traders
regard such targeting as potentially dangerous.
Leadership Focus