Economistsand politicians alike debate the relative merits of free trade and fair trade.Although both concepts refer to a comprehensive approach to commercialactivity, people who favor one approach over the other are often guided byideological concerns that affect the political regulation of trade activity.Free trade and fair trade address the same subject but from very differentperspectives.
Free TradeProponents of free tradeemphasize the reduction in barriers between countries and the elimination ofpreferential policies that favor countries or specific industries. Free tradersbelieve that a business should succeed or fail based on its ability to respondto the free and open market, without needing special governmental protectionsto protect the industry or its workers. Many free trade advocates advocate forthe elimination of tariffs and subsidies, and oppose regulations that forcecompanies to pay extra for doing business in foreign markets.
Fair TradeFair trade advocates focus on thewages and working conditions of labor in developing markets. For example, afair trade activist will fight to increase the wage rates of workers andimprove their working conditions, especially when a large multinational corporationchooses to pay pennies per hour for labor in one country instead of dozens ofdollars per hour elsewhere. Fair traders suggest that companies and governmentsshould regulate trade to ensure that workers receive a just level ofcompensation and a safe working environment. “Fair trade” as a termis sometimes used to refer specifically to policies that provide a living wageto farmers for their crops, usually above market prices, because local andsmall-hold farmers often cannot compete on price with large-scale factoryfarms.IdeologyFree trade advocates are usually conservative or libertarian; theirsupport for smaller government and less regulation, in general, leads them tobe skeptical of government programs to redistribute wealth or income. Fair tradeadvocates, by contrast, tend toward a communitarian outlook that favorsequality of outcome, and they are more willing to embrace government action toimprove people’s quality of life.
These differences in political outlook oftenmake trade policy a matter of considerable debate within national legislatures.”Free”Trade Agreements. A real free trade agreement would say “There are norestrictions on trade between these countries,” but most agreements arethousands of pages. Why? After legitimate reasons (dispute settlement,standards, etc.), most of the text restricts trade to protect local producersfrom outside competition. (The same local producers lobby for exports abroad.)The EU’s “bra war” was between retailers and consumers seeking cheaperChinese textiles and producers seeking higher profits.
Chinese producers had nopower. Free trade benefits consumers, who get better, cheaper goods. Itbenefits efficient producers with larger sales. Inefficient producers are hurt;they go out of business and fire their workers. This is not bad from a socialperspective if that industry is “valuesubtracting” by divertingresources from better uses. Typical examples ofbusinesses that subtract valueare “national champions” such as steel producers, airlines, car makersand agricultural commodity producers. European and American sugar producersprotected by quotas (quantity limits) and tariffs (import taxes) sell theirsugar for three times the world price.
Europe even exports subsidized sugar,hurting competitive producers a second time. This situation persists becausesugar producers, who get large benefits, lobby for protection; the costs aresmall for each consumer, so it is not worth their effort to oppose protection.Sugar protection is particularly atrocious because it prevents developing worldproducers from rising out of poverty. Freetrade can be fair, but agreements that open some markets to powerful producerswhere they can use their market power, while keeping others closed anduncompetitive, are neither free nor fair. The little guy (the consumer, thesmall producer, the poor farmer, the developing country) gets hurt. When nobodyhas special treatment and the field is truly level, then free and fair willmean the same thing. Competition may be tough on the level playing field, butpolitical power and legal leverage tilt it further.
Free trade is fair tradewhen it is truly free. Beware of cheap imitations.