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Why “Fair” Trade Is Not The (Whole) Answer

Politics / US Politics Mar 18, 2011 - 05:24 AM GMT

By: Ian_Fletcher

Politics

The idea of “fair” trade is very appealing, whether confronting the plight of autoworkers in Michigan or farmers in the Third World. Unfortunately, it will be only a small part of any trade solution for the U.S. and the world as a whole.

Fair trade in goods like coffee is a fine thing, because there exists a clear idea of unfair practices in how coffee importers treat coffee farmers and how to avoid them. That sort of fair trade basically consists in First World consumers voluntarily not using the full strength of their bargaining position with Third World producers. This is admirable enough.


Unfortunately… fair trade embraces less than one percent of trade in cocoa, tea and coffee, so it will have a small impact for the foreseeable future. Can the idea scale? Perhaps. There are some encouraging signs, like Nestlé’s recent announcement that it will henceforth make Kit-Kat bars sold in Europe out of fairly traded chocolate. (But not America. What gives, Nestlé?)

More fundamentally, there is currently a huge sandbag blocking fair trade from further acceptance: mainstream economics holds that it is largely futile, or even counter-productive. For example, conventional economics holds that the price supports entailed by fair trade encourage overproduction and drive down the price for other growers.

So conventional economics must carefully be picked apart, using its own conceptual vocabulary, before fair trade can even get a decent hearing outside those already committed to it. This means, above all, getting away from the “free markets are always right” economics that dominates the field in the U.S. Pure free markets aren’t the way ex-Third World nations (which means everyone from South Korea to the good old USA, if you go back far enough) escaped poverty, so they aren’t likely to work now.

For Americans, the more important meaning of fair trade concerns questions like what is the fair share for U.S. firms in the Chinese airliner market? Because the greater share of America’s trade problem concerns products like airliners, not coffee. These high-tech, high-value products are decisive for U.S. trade performance and will be the main objects of any future American industrial policy. This is where the battlegrounds for American jobs are.

Unfortunately, the concept of fairness is a political minefield. A political coalition strong enough to abolish free trade will need support on both sides of the aisle, and these sides disagree about what is fair every day. This problem is even worse when foreign societies are involved (as they must be in trade) because different societies define fairness differently.

The Japanese, for example, consider it unfair to lay off workers in a recession—for core employees at major firms, at least. Many European countries consider America’s antiunion “right to work” laws unfair. (Imagine if nations like Germany and Sweden, where unions enjoy rights undreamed of in the U.S., like guaranteed board representation, were to demand that Alabama, Texas, and similar states rescind their right-to-work laws as a prerequisite for being allowed to export to the EU!)

As former trade diplomat Clyde Prestowitz has pointed out:

Because the law assumes that American-style capitalism and laissez faire international trade are not only good but morally right, it implicitly defines deviations from such a system as ‘unfair.’ There is no provision for the possibility of a different system or for dealing with problems that arise not out of unfairness but from the grinding together of systems that simply do not mesh well.

As a result, appealing to fairness to resolve trade disputes, or judging foreign actions by a standard of fairness, is unlikely to solve anything.
To take another example currently in the news, there is no particularly good reason why currency manipulation should be considered “unfair.” Currency manipulation is a tactic, and while the U.S. should certainly fight back to restore advantageous currency values, this is about protecting the national economic interest, not ethical justice per se.

Fairness isn’t even a particularly meaningful concept in much of trade economics, which turns on technicalities like capital flows and economies of scale. And fairness isn’t the objective of trade policy for the most part, anyhow. Prosperity (of ourselves or others) is. Decent people naturally hope these will coincide, but one can’t just a priori assume this.

China’s authoritarianism, for example, is morally objectionable in a dozen different ways, but it has probably raised the living standards of the Chinese. If prosperity is what we want, then we need to admit that prosperity is what we’re after (subject to whatever ethical constraints we believe in).

It is similarly pointless to argue about whether America’s trade mess is the “fault” of foreign nations or ourselves. Realism demands that we assume foreign nations will take advantage of any opportunities we put before them. And even if foreigners really are to blame sometimes, we don’t have control over their actions; we have control over our own.

Ian Fletcher is the author of the new book Free Trade Doesn’t Work: What Should Replace It and Why (USBIC, $24.95)  He is an Adjunct Fellow at the San Francisco office of the U.S. Business and Industry Council, a Washington think tank founded in 1933.  He was previously an economist in private practice, mostly serving hedge funds and private equity firms. He may be contacted at ian.fletcher@usbic.net.

© 2011 Copyright  Ian Fletcher - All Rights Reserved

Disclaimer: The above is a matter of opinion provided for general information purposes only and is not intended as investment advice. Information and analysis above are derived from sources and utilising methods believed to be reliable, but we cannot accept responsibility for any losses you may incur as a result of this analysis. Individuals should consult with their personal financial advisors.


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