Free Trade vs. Fair Trade? - Paul Gunstensen

The question of whether free trade or fair trade is the answer to developing countries’ problems depends on whom you ask. An orthodox economist sitting behind a desk at the United States Treasury or the International Monetary Fund would reply ‘free trade’. A small-scale coffee farmer in Central America will almost certainly answer ‘fair trade’. But what is the difference between the two terms and why are they so important?

The importance of trade was first recognised during the Enlightenment period in the 18th Century in the work of Adam Smith, a man often referred to as the ‘Grandfather of Capitalism’. It fell to David Ricardo to develop Smith’s work into his now famous theory of ‘Comparative Advantage’: a belief that countries should concentrate on the production of those resources or commodities that they have a comparatively greater abundance of. This theory has formed the backbone of economic thinking on trade ever since, manifesting itself into orthodox or neoclassical economics where the arguments for free trade are really played out.

Orthodox economists see trade as the ‘engine of growth’, and growth as the key to the alleviation of poverty in the developing world. They argue that trade can, and will, raise wages and benefits to workers as the expansion of foreign markets for their goods leads to increased demand; they therefore increase supply and get paid more. An increase in wages consequently increases the consumer capacity of the workers, who can then afford to buy foreign imports. While this a grossly simplified version of what is a complex series of events, it nonetheless suggests a situation where everyone appears to benefit.

However, the modern world is seeing the advent of a new global economy. The consolidation of capitalism, at its exploitative best, and the spread of globalisation are changing the face of trade and global business. The need to increase profit margins while decreasing production costs is the name of the game; something that orthodox economists and transnational corporations would argue is best achieved through maximising global competitiveness. They contend that countries should adopt trade liberalisation, open their markets up to foreign competition and scrap trade barriers, tariffs and regulations. The state, it is argued, should play a minimal role.

Behind these measures lies an unfailing belief in ‘the market’ to set prices at the ‘right’ level, and to provide sufficient supply to meet demand. An increase in trade increases demand and the less restrictions on this exchange the better. Trade barriers, tariffs and regulations represent restrictions that cause imperfections in the market and distort prices, and are therefore treated with disdain.

It should be noted that through the course of history, countries have traditionally sought to protect economies and industries against competition through the use of trade barriers and import tariffs and regulations. This affords local or home industries the protection needed to develop and expand into solid sectors of an economy.

It is ironic, then, that the very countries campaigning most ardently for free trade themselves benefited from trade barriers, tariffs and other protectionist measures in their own economic development. The United States is perhaps the best example, when one considers the huge pressure exerted by the US Treasury for free trade, as trade was manipulated by the US until its economy was established enough to cope with competition. Similarly, the ‘tiger’ economies in East Asia have used such restrictions very efficiently to bolster their economic development.

In fact, most free trading economies in the western world still use some form of regulation or corporate lobbying to ensure that their economies are protected from cheap imports and are often reluctant to scrap tariffs. The recent transatlantic stand off over tariffs imposed by the US on steel imports from the European Union is a perfect example. The tariffs, imposed to protect the vulnerable US steel industry, were eventually dropped after 21 months and only after an uncertain World Trade Organisation deemed them illegal. Many would argue that it was EU threats to slap tariffs on all things ‘American’, potentially very damaging to a struggling US economy, that eventually lead to the climb down.

While the industrialised nations clamour for access to the domestic markets of developing countries, in a continuous scrabble for new markets and higher profit margins, reciprocal access is often effectively denied. In an interesting twist, an IMF ‘openness’ test (a test designed to establish how open an economy is to foreign interest and trade) found that many poor countries are now more open to trade than the pioneering free traders in the rich industrialised west.

Indeed, it would seem that the use of the word ‘free’ is something of a misnomer in this context, hinting as it does at elements of freedom, democracy and choice. The reality is often very different, as free trade agreements can have devastating effects on the economies of developing countries.

The liberalisation of domestic markets and the relaxation of trade barriers enables transnational corporations to invest in the infant economies of developing countries, creating competition that is unhealthy for local industries and small-scale businesses. Large transnational corporations can often weather decreasing prices and short-term losses better than the more fragile local businesses, many of which are forced out of production.

One key aspect of free trade agreements is the recognition of intellectual property rights, a crucial weapon in the transnational corporation arsenal. However, the issue of the protection of rights pretty much stops there. There is little, if any, recognition of the rights of workers or employment standards within free trade agreements. This is essentially what makes the whole concept so attractive.

For example, if a company moves production to a developing country that has an infant economy with no labour, health and safety or environmental standards, the reduction in production costs is potentially massive. The company is under no obligation to pay a minimum wage, have a set working day, have any health and safety standards or care for the environment. It is these factors that increase profit margins in industrialised countries and most companies, when offered an opportunity to cut production costs and increase revenues, will jump at the chance. This results in the ‘sweatshops’ that the media loves to portray.

The developing countries are in a difficult position. If they were to start advocating for labour and environmental standards and allowed workers to form unions, transnational companies would take their business and, more importantly their investment, elsewhere. There is very little room for manoeuvre, especially as foreign investment can be so crucial to the economic development of developing nations.

So free trade is not so free, it’s not so equal and can be very exploitative. But what is the alternative? The concept of fair trade is not new, though it has risen to prominence in the 1990s. From humble beginnings it now accounts for £2 billion turnover worldwide, a drop in the ocean when compared to overall worldwide revenues.

Put very simply, fair trade is an attempt at more socially conscious trade, where consumers in industrialised countries pay a premium on products, which ensures that producers receive a fair and constant price for their goods. A major principle of this type of trade is the formation of long-term contracts and relationships between consumers and producers, enabling producers to plan for the future and providing the incentive to invest in means of production.

There are many within the fair trade community who see it as a more equitable and less hypocritical form of trade, which could act as a spur for the more balanced economic growth that developing countries need. The fair trade community has spread within Britain over the last few years, helped along by larger players entering the market. The Co-operative Society Supermarkets have been the market leaders in this respect and now stock a wide variety of products. Marks and Spencer recently announced to the stock market that it would soon be stocking fair trade clothes, made from fair trade cotton grown in India.

One of the major challenges that fair trade faces is increasing awareness of the plight of producers and also increasing the diversity of products, important as consumer’s choices and tastes fluctuate. Some have argued that while the fair trade market is expanding, at around 25 % a year, it will always occupy a small portion of the market. The real role for fair trade, they argue, is in drawing attention to the exploitative effects of free trade agreements in agriculture and food production and the apparent hypocrisy of the industrialised nations when conducting trade.