You may have encountered the idea of "Fair Trade" or "Free Trade" in your daily life. Perhaps you were in the local grocery store looking for some herbal tea and noticed a sticker on the box or bag that said "Fair Trade Certified," or something along those lines. Perhaps you've read the newspaper about the WTO and "Globalization" and "Free Trade." Maybe you have a preference for one or the other. Or maybe, like me you're not quite sure of the difference between them, nor their importance to our lives as citizens in a prosperous country or as consumers.
Let's start with some definitions. Free Trade is the idea that trade should be unimpeded by excessive rules and regulations, usually established by governments. These governments create tariffs on goods they see as a threat to their own, domestic industries. The high tariffs prevent or at least make it harder for other countries' goods to be sold in the particular country. This of course makes it easier for domestic industries to compete amongst themselves (they don't have to compete on the world market for domestic customers).
Fair Trade takes the idea of free trade a bit further. Proponents of fair trade believe that free trade doesn't quite cut it. They think that trade should also be "fair." This might mean that rather than eliminating a tariff as a solution to helping a poorer trading partner, they would advocate paying more for the good, to ensure the producer gets a "fair" price. The problem (as the Economist points out) is that the definition of "Fair" is often quite subjective. Frederic Bastiat, a 19th-century French satirist, once observed that the sun offered unfair competition to candle makers. If windows could be boarded up during the day, he argued, more jobs could be created making candles. You can see where this line of thinking might take you.
Most Free Trade agreements were facilitated by meetings with richer countries and agreements that they would lower tariff rates from around 40% down to 4% on manufactured goods. This has been a boon for consumers. Think of cars, for example. Imagine not being able to purchase a Toyota, Honda, Mercedes, etc. Even though these cars tend to have an arguably higher quality rating than domestic brands, with high tariffs in place, you would have to pay a higher premium for them, most of which is used to pay the import taxes to the government. Think of how happy Ford or GM might be at higher tariffs on foreign cars. They wouldn't have to try very hard to produce a competitive car, because they know the consumer might consider price a major factor in their purchasing decision.
While manufacturing has benefited around the world due to the lessening of restrictions, world-wide agriculture has been severely retarded by high tariffs, mostly from developed countries. This hurts developing and third-world economies as farming is usually one of the only ways they can make money (textiles and clothing are also other markets they are often shut out of). An example from an article here (also posted in the comments section) cites the sugar industry as having a particularly nasty lobby that contributes money to politicians in order to ensure that tariffs on sugar in America and Europe remain quite high. As a result, consumers (you and me) pay quite a high premium on sugar, that if we had access to the world market price, sugar would be 90% cheaper. You might be thinking that you don't buy sugar very often and that it doesn't really affect you, but think again. The sugar that goes into candy, bread, sauces, etc. is all being bought at higher prices. Lower these prices, by buying sugar on the world market (and thus supporting poorer farmers from Africa, South America and Asia), and you would naturally decrease the price of a lot of consumer consumables made with sugar. You can help people and still be selfish!
You may have pegged me as a free-trade advocate or as a pro-globalization nut, but I would say that I'm a consumer advocate above all. And with that in mind, I'm not totally opposed to fair-trade, as long as I (and other consumers) have a choice in the matter.
Common advocacy for Fair-trade might be identified closely with the coffee and tea industries of the world. According to the International Coffee Organization, there are over 25 million coffee growers/producers in the world. A lot of times coffee can account for over 75% of a country's export income. Companies like Cafe Direct work with farmers from countries that don't have access to the richer markets and help advertise their coffee. This newly branded "Fair Trade Coffee" sells at a premium compared to other coffees, because the consumer is paying for the price of producing the coffee, plus a "social premium" that covers the cost of living in the country where the coffee was produced, a measure preventing the producer from taking on too much debt, and enough to help the farmer/co-op to improve their operation.
If a consumer wants to help poorer people who are trying to make a living in a world where tariffs and unfair rules are preventing them from getting a fair price, then I applaud them. One of the nice things about living in a free, capitalist society, is that the choice to buy fair-trade goods is available.
However, I think that when it gets right down to it, I would prefer the "Free-trade" approach and have governments lower their barriers to entry and have a truly global market available for all types of goods and services. This would allow countries to specialize in the types of manufacturing or agriculture (or services) that their talents, geography, and culture would best support. This idea is called comparative advantage (a great practical example concerning Country Alpha and Country Omega is highlighted in the link). This idea is extremely important when it comes to understanding the benefits of Free-trade.
I was talking with two different friends at two different times. One had recently returned from Peru on a humanitarian mission and the other had lived in Mexico during her years in college. The friend who had been to Peru lamented the encroaching presence of Wal-mart and McDonalds and the friend who lived in Mexico thought that globalization was destroying their simple way of life; their "culture," as she put it.
Both arguments, to me seem quite selfish, and are based on the idea that the people of these different countries want to continue to live in the poverty they currently find themselves in. The people in Mexico (where she lived) had to live in mud huts and electricity was a luxury. Their major crop was corn of which they mostly grew enough to survive on. She said they couldn't sell it because they wouldn't be paid much. Imagine if trade barriers in the United States for corn were erased. Those people in Mexico might be able to sell their corn on the open market for less than what it costs an American farmer to grow it.
The consumer benefits because now they have more money to buy other things with, the Mexican farmer benefits because they have income to which they can buy electricity, more land to farm, or what they deem necessary. The loser is the American farmer. Currently the source of the most opposition (or fill in whatever industry worker you want: textiles, furniture, cars, anything). They are the ones that want tariffs. They are the ones complaining about losing their jobs to the Chinese or Indians (or Mexicans in the above case). What people need to understand is that because the farmer can't produce the corn at a value to the consumer, they can now do something else. They can learn how to program computers or work in sales. Or maybe they can find jobs as consultants to the farmers in Mexico. The point is that the economy is dynamic and that because both economies have gained from the loss of the inefficiency there is now more resources, money, time to hire that unemployed farmer to do something more productive or relevant to the comparative advantage of the United States.
Free-trade, in my opinion, is the way to end world-wide poverty (or at least come pretty close). Allow people to produce goods at a truly fair price and begin to specialize their economies for the benefit of the whole world. Let consumers spend less on goods that can be produced by those specialized economies and then use the money saved to increase the specialization of their own country.
Two articles here talk about Fair Trade and Free Trade from differing perspectives. Read them and let me know what you think of the whole affair.
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Tired of globalisation
Nov 3rd 2005
From The Economist print edition
But trade liberalisation and other forms of openness are needed more than ever
FREDERIC BASTIAT, who was that rarest of creatures, a French free-market economist, wrote to this newspaper in 1846 to express a noble and romantic hope: “May all the nations soon throw down the barriers which separate them.” Those words were echoed 125 years later by the call of John Lennon, who was not an economist but a rather successful global capitalist, to “imagine there's no countries”. As he said in his 1971 song, it isn't hard to do. But despite the spectacular rise in living standards that has occurred as barriers between nations have fallen, and despite the resulting escape from poverty by hundreds of millions of people in those places that have joined the world economy, it is still hard to convince publics and politicians of the merits of openness. Now, once again, a queue is forming to denounce openness—ie, globalisation. It is putting at risk the next big advance in trade liberalisation and the next big reduction in poverty in the developing countries.
In Washington, DC, home of a fabled “consensus” about poor countries' economic policies, a bill before Congress devised by one of New York's senators, Charles Schumer, threatens a 27.5% tariff on imports from China if that country does not revalue its currency by an equivalent amount. In Mr Schumer's view, presumably, far too many Chinese peasants are escaping poverty. On November 4th George Bush will escape the febrile atmosphere along Pennsylvania Avenue by visiting Argentina to attend the 34-country Summit of the Americas. There he will be greeted by a rally against “imperialism”, by which is meant him personally, the Iraq war and the Free Trade Area of the Americas which he espouses. Among the hoped-for 50,000 demonstrators will be Diego Maradona, who as a footballer became rich through the game's global market and as a cocaine-addict was dependent on barrier-busting international trade; and naturally his fellow-summiteer, Hugo Chávez, who is using trade in high-priced oil to finance his “21st-century socialism” in Venezuela.
All, perhaps, the normal fun of a Latin American visit. Last week's Latinobarómetro opinion poll revealed that whatever the protesters may say, a clear majority in all the region's countries favour a market economy rather than a closed, state-directed one—even in Venezuela (see article). This is, however, a difficult moment for the market economy and for relations between rich countries and poorer ones, for the Doha round of trade-liberalisation talks under the World Trade Organisation are in trouble. When it began in 2001, the round was billed as a big effort to boost growth in poor countries, and the lowering of barriers to food trade was placed at its centre. In the past few weeks, however, a fairly bold American proposal for reducing its farm protection has been greeted by a much weaker response from the European Union and none at all from Japan. And ministers from Bastiat's own country, France, have vied with one another to denounce all talk of further reform to the EU's common agricultural policy. Europe must, they say, remain an “agricultural power” even at the expense of the taxpayer and the poor, and, according to President Jacques Chirac, must fight back “liberalism”. Whatever happened to Liberté, Egalité, Fraternité?
The world will find out, to some extent, next month when ministers from the 148 countries in the WTO meet in Hong Kong. The last time they gathered for such a crucial meeting was in September 2003 in Cancún, and the result was a shambles. There was a bitter row between rich countries and poor ones, and the meeting broke up in acrimony. At that stage, however, there was still plenty of time to repair the damage. For in effect the deadline for the Doha round comes in June 2007, when the trade-negotiating authority granted by Congress to President Bush expires. But, although that leaves more than a year and a half after Hong Kong, the complexity of a negotiation involving 148 countries and scores of highly technical issues means that the deal really needs to be done during 2006, with the political framework for it set early on—which essentially means in Hong Kong.
The case for selfish generosity
Trade-liberalisation rounds are arcane affairs about which free-traders are often thought to cry wolf. The previous talks, known as the Uruguay round, went through lots of brinkmanship and delays before they were completed. The result was still disappointing in many ways, especially to developing countries, and yet since the round's completion in 1993 the world economy has grown lustily and the biggest developing countries, China, India and Brazil, have all burst on to the global trading scene. Would the world really be hurt if the EU merely refuses to expose its farmers to more competition?
The likeliest outcome both from the Hong Kong meeting and the eventual Doha agreement is a compromise—as always. The European position is feeble but not risible, for it has offered an overall average cut in its farm tariffs of 39%, up from 25% only a month ago, though with rather a lot of loopholes that could severely limit the benefits. France, and other European farm protectionists, may prove more flexible than they currently imply: this is hardly the first time they have promised to man the barricades shortly before striking a deal. Yet though some sort of fudge in Hong Kong must be likely, with the Americans lowering their ambition and the Europeans raising theirs a little, such an outcome would still represent both a missed opportunity and a risk.
The missed opportunity is that Doha has offered the first proper chance to involve developing countries in trade negotiations—they now make up two-thirds of the WTO members—but also thereby to use a full exchange of agricultural, industrial and service liberalisations to make a big advance in free trade that could benefit a wide range of countries. Some of that progress may still be made, even in a fudged deal: Brazil, for example, stands to benefit hugely from freer trade in agriculture (see article), so it should be willing to promote other concessions in return. India is reluctant to cut its own farm tariffs but has a big interest in liberalising trade in services, wanting more freedom in everything from finance to health care to entertainment. But if the rich world could gird itself to be more ambitious on agriculture the gains would be even greater: help for the poorest countries, making the rich look generous; better access to the biggest and richest developing countries for western companies; and a rise in global income in a decade's time of $300 billion a year (says the World Bank), which would thus help everyone.
The risk is that failure to agree on a new wave of openness during a period (the past two years) in which the world economy has been growing at its fastest for three decades, with more countries sharing in that growth than ever before, will set a sour political note for what may well be tougher times ahead. A turn away from trade liberalisation just ahead of an American recession, say, or a Chinese economic slowdown, could open up a chance not just for a slowdown in progress but for a rollback. Currently, for example, the Schumer bill to put a penal tariff on Chinese goods looks unlikely to pass. If American unemployment were rising and world trade talks had turned acrimonious, that might change. So might the political wind in many developing countries.
If so, that would be a tragedy for the whole world. Although the case for reducing poverty by sending more aid to the poorest countries has some merit, the experience of China, South Korea, Chile and India shows that the much better and more powerful way to deal with poverty is to use the solution that worked in the past in America, western Europe and Japan: open, trading economies, exploiting the full infrastructure of capitalism (including financial services—see our survey on microfinance) amid a rule of law provided by government. In other words, globalisation. To paraphrase Samuel Johnson, anyone who is tired of that is tired of life.
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