Why Fair Trade Would Be More Preferable than Free Trade

In the present configuration of an increasingly globalised world, the volume of global trade transaction has been continually increasing. Furthermore, it can be argued that the current international trade regime has its root on the specific neo-liberal attributes to globalisation. Indeed, institutions such as the International Monetary Fund, the World Bank, and the World Trade Organization have been very staunch in promoting neo-liberal values in the implementations of economic and trade regulations. However, these promotions of the implementation of neo-liberal trade policies have yet to bear fruits in most of the developing countries. Rather, there is an increasing concern of an international trade regime that is deemed to be unequal or 'unfair'. Thus, this essay will focus on specific grave issues related with the current trade regime (which is free), namely the issue of unequal arrangements in the existing free trade regime experienced by many developing and underdeveloped countries. The solutions of increased state interventions in the market in the frameworks of fair trade will then be expounded upon. Lastly case studies will be given as a final piece of evidence for why fair trade would undoubtedly be more preferable than free trade in the contemporary international trade regime.

Free trade, in its strictest sense refers to the minimisation of trade barriers to create a condition of equal ‘playing fields’ between countries in the international stage. Furthermore, Jagdish Bhagwati has postulated that ‘…we know what free trade means — we mean by it the absence of price or quantity interventions in trade that prevent the translation of world prices into domestic prices …’. This would entail that a condition of trade that is free is in turn also fair (because countries do not impose specific protectionist measure to distort the competition in the market), is usually taken for granted. Indeed, one main defining economic principle surrounding this idea of a ‘free and fair’ trade based on the famous Comparative Advantage principle proposed by David Ricardo. It holds that even in the condition where one country has a higher efficiency rate in the productions of all products compared to another country, the fact that there exist an inequality in the forms of differing rates of labour productivity infers that a positive sum-game could be reached when those countries decided to engage in a free trade, specialising in a specific product and engaging in the exportation of the product in which that country has a comparative advantage and importing the other products. This argument is in turn materialised in the attempt made by WTO to reduce artificial trade barriers (tariffs or quotas) through negotiations and agreements enshrined within the WTO which are binding for its member states (Stiglitz, 2006).

Proponents of free trade have argued that this principle would lead to a more efficient relocation of resources, and thus would be beneficial for all parties involved in free trade (Krauss, 1997:5). However, there is an inherent flaw in this argument leading to the current international trade regime which is unfair and imbalanced, especially seen between the first and the third world. According to Stiglitz (2006), trade liberalisations could only be beneficial for both parties if the economies and employment climate of both parties are already mature. This condition however, is not applicable for many developing and underdeveloped countries. Furthermore, the fact that international institutions such as the World Bank, and IMF, imposes certain conditions (trade and economic liberalisations coupled with decreasing state intervention on the market among them) as prerequisites for lending aids to many developing countries further exacerbates this issue. Indeed, trade liberalisation has had an excruciating impact on the economic development of these countries. According to Oxfam in 2002, an international organisation focusing on the promotions of social justice and eradication of poverty, ‘97% of the income generated by international trade benefits rich and middle income nations, leaving just 3% for poor nations.’ To better illustrate the issue of the inequality of the current trade regimes, and the potential exacerbating impact of trade liberalisations on developing countries, a case study on Ghana is given in more details.

The case of Ghana has proven that trade liberalisations has had a major failure, and it actually increases poverty and inequality rate, as well as a decline of the local poultry industry. The three phase of liberalisation process from 1957 up until 2012 has resulted in an overall decrease of the average tariff rates from approximately 44% in the early 1980s to a stable rate of around 13% during the course of the 2000s. This implies that prices of imported products in Ghana have been falling steadily due to the fall of the tariff rates applied to these products. In 1995, 42.7% of total GDP of Ghana was contributed from the agricultural sector. This, coupled with a comparatively cheap labour in the country, should have given the Ghanaian a comparative advantage in terms of agricultural products production compared to the US and other EU countries. However, growth and specialisation predicted from the comparative advantage principle model did not result. If anything, the Uruguay Round from GATT (General Agreement on Tariffs and Trade) which resulted in the Agreements on Agriculture for Ghana has proven to be particularly ruinous for the country (ibid.). This is due to the various flaws in the agreements signed in the Uruguay Round, which loopholes have actually allowed many developed countries to maintain their protectionist measures (among which is to heavily subsidise agricultural products to compete within the global market), while at the same time opening up local markets of Ghana to be flooded by these heavily subsidised produces, resulting in an unequal price comparisons between Ghanaian local produces and the imported produces. From this case study it is clear that there needs to be a greater control over the current free trade regime to address the current trade regime that is disadvantageous towards the less developed countries.

Creating an international trade regime that is fairer, and does not tilt the favour to the developed countries is important in trying to address this issue. This is why Fair Trade or a trade liberalisation which does not discriminate against the developing countries and asymmetrical from its current configuration is needed. In this context, Fair Trade could be seen as a regime system aimed at increasing the level of equity within the current international trade frameworks. This could be implemented in the frameworks of State Interventionism as promoted staunchly by Stiglitz in his book Fair Trade for All: How Trade Can Promote Development (2005). He has argued that due to the imperfect nature of the market, especially seen in the developing countries, it is important for the government to take a stronger role in promoting the economic development. The East Asian Economic Tiger (comprises of Japan, Taiwan, China, and South Korea) could be seen as an exemplification where trade liberalisations coupled with active interventionism measures could lead to a massive economic growth and developments (Stiglitz and Charlton, 2005).

A specific case study supporting this would be the state regulations implemented by China in regards to its current currency market system. The Chinese Government has been actively intervening in the appreciation of the RMB, especially against the USD, which implications resulted in cheaper exports of the Chinese products and more expensive imports of foreign products. Although some might argue this creates an unfair playing field whereby China could actually exports cheaper, thus resulting in a net surplus in its trade account in relation to the US due to its ‘fake’ exchange rate, a fairer trade regime would undoubtedly entail the need for the developed economies to compromise for the sole purpose of bestowing a greater level of equity in the current trade system. A more expensive import would also leverage the local Chinese technological products, considered as one of the crucial infant industry in contemporary China, and this in turns contributed to the flourishing Chinese IT industries. Furthermore, the benefits of implementations of fair trade policies are not isolated in the East Asian countries. Ruben (2009) has noted that based on the differing impact analysis he had done, focusing on primarily agricultural sector of Latin American Countries (Peru, Costa Rica, and Ecuador), it is clear that a general trend of improvements in the livelihood of small-scale farmers, although modest, could still be seen.

The issue of what entails fairness is one of the main ongoing debate in the promotion of Fair Trade. As stated by Stiglitz and Charlton (2005), ‘… because the circumstances of the different countries are different, any agreement that applies ‘fairly’ or ‘uniformly’ to all countries may still have large differential effects …’. However it is still clear that Fair Trade offer an alternative path of trade globalisation whereby the developing and underdeveloped countries could have a more equal playing field in the international trade system. Free Trade with its neo-liberal market principles has failed to address this issue, for the market by itself is seemingly unable to ‘fix itself’ in the absence of any check and balance measures enforced by other entities (which in this case, that entity would be the state). Considerable research has also been done, and has shown in general that a fairer trade regimes, implemented within the framework of state interventionism, could to some extend manage to improve the equity level within the current international trade regime.

References

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