Free Trade Vs. Fair Trade

Free Trade Vs. Fair Trade

PLEASE NOTE THAT THIS ARTICLE IS FROM 2005. VISIT OUR HOMEPAGE FOR NEW CONTENT.
Fair traders and free traders have a surprising amount of common ground. Both camps are concerned with global justice, poverty alleviation and global prosperity.
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, the terms of which meet the demands of 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. 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. 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.

F.H. Cardoso and Enzo Faletto published Dependency and Development in Latin America in 1969, the first academic statement of dependency theory. In it, Cardoso and Faletto argue that "economic development has frequently depended on favorable conditions for exports." Argentina in 1900 looked economically very similar to the United States of 1900, but Argentina's growth was severely depressed when compared to U.S. economic growth over the twentieth century. Cardoso and Faletto attribute this decline to unfavorable terms of trade relationships for Argentina.

Later versions of the dependency theory 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."

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 supracompetitive prices - prices that exceed the equilibrium price, as a form of poverty alleviation.




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 gin and vermouth. Here and There fought some brutish wars many decades back, but they have come to terms with each other by finding their common ground: martinis.

Laborers in Here can produce gin at a rate 10 units per hour and can produce vermouth at a rate of 1 unit per hour. Over There, where grapes are abundant, Laborers produce vermouth at 10 units per hour, but produce gin 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 martinis:

In Here, laborers are divided evenly between gin and vermouth. At the end of one hour, Here gin producers (five of them) each have made 10 units of gin for a total of 50. The other five work on vermouth, 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 vermouths and 400 gins. In There, laborers are divided evenly. They end up with 400 vermouths and 40 gins.

Martinis are best when they're three parts gin to one part vermouth. That means Here can make 120 martinis before running out of vermouth to add to gin, and There can make approximately 13 martinis before running out of gin.

Of course, Here will have an excess 280 gins, and There will have an excess 387 vermouths, for a possible increase of 93 martinis between Here and There per day. If they trade, Here and There can both increase its number of martinis. If they don't, those 93 extra martinis 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 gin and vermouth and selling each other some of its excess, Here could fully employ its workers in producing gin, and There could fully employ its workers at producing vermouth. 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 martini 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 martinis than There as long as martinis call for more gin than vermouth. But There is not likely to be upset; There unambiguously has more martinis 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?

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?
In a conversation, 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.


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 include the immediate needs of those in the least well off group, while free traders regard such targeting as potentially dangerous.




Contributed by Jeffrey Eisenberg, former editor of aWorldConnected.org and a graduate of the University of Virginia. Reprinted with permission from A World Connected.

To read a Global Envision article about Fair Trade, see How "Fair" is Fair Trade?



Return to top
Tags: 
Categories: 

Curated news and insights about innovative, market-driven solutions to poverty explored through news, commentary and discussion.

Learn more »

Global Envision newsletter