Fair Trade vs Free Trade Analysis - Report Example

What do we mean by ‘fair’ trade? Can free trade be ‘fair trade’? Introduction Fair trade is an international social and economic approach based on the basic principles of balanced development through sustainability in developing countries. It’s organized in such a way that the current movement seeks to ensure economic and social justice to developing nations through higher (or rather fair) prices to producers while at the same time ensuring that environment is sustained and not destroyed. The movement advocates such basic requirements as higher wages, market access, dissemination of knowledge about new production techniques, environmental sustainability, the citification mechanism of producers in exporting countries and certification of products in importing countries and creating awareness of such products among consumers of the developed world (Singh, 2001). On the other hand free trade is a global effort to carry out international trade free of negative protectionist practices such as higher tariffs on imports, subsidies to domestic producers, foreign exchange restrictions, dumping cheaper goods abroad, imposing dubious standards on imports and import substitution by propping up unwieldy domestic industries. Theoretically free trade is based on neoliberal economic principles dating back to Ricardo’s argument on the principle of comparative advantage. Analysis Free trade and fair trade aren’t necessarily the same though some of the ultimate outcomes would converge. In fact divergences between the two are many and if free trade were practiced with full force indeed, fair trade would take a back seat. Globalization has been the catch word used by many who advocate free trade. Such people vehemently support all and everything in the name of free trade. On the other hand fair trade is a distant cousin of free trade. An inevitable aspect of this relationship between the two is that the former is marginalized while the latter is well placed at the center of the global market. Fair trade is essentially replete with intricate nuances ranging from market access facilitation processes to marginalized producers to sustainability efforts. Such noble principles need some theoretical and conceptual frameworks to support them though. Free trade theories are many while the principle of comparative advantage is the most predominant among them. The basis on which free trade is advocated by its supporters is determined by a series of arguments which in turn are associated with neoliberal perspectives. In the first place globalization is the logical premise used by supporters of international free trade to argue their case for a more liberal environment of imports and exports. In other words free traders demand that shifting borders of production away from their national territories into the larger more expansive outer perimeters would benefit both the host country and the principal country. This argument seeks to focus attention on the free flow of not only goods and services but the very means that are the underlying cause of all free trade, viz. free movement of capital or Foreign Direct Investment (FDI) flows. As against this argument of free traders, fair traders have no such theoretical construct or underpinning to support their stance; neither do they have a coherent set of principles except to base their arguments on the necessity to pay fair prices to marginalized producers in the developing world. Indeed sustainability concept has some stronger economic appeal in the absence of an articulated theoretical and conceptual framework of reference though. Fair traders depend on environmental sustainability to such an extent to compel, of course with a degree of morality, buyers to pay attention to the fact that the avoidance of environmental degradation in the production process could have a far reaching positive impact on future generations of population irreswepctive of where they live. But nevertheless very few people have been impressed by this type of arguments. The majority remains skeptical about the validity of outcomes such as costs. Despite the fair traders’ claim that social costs would be minimized through their efforts, private costs are not borne by producers but effectively passed onto consumers elsewhere. This aspect of the two concepts focuses on the very theoretical foundation of the arguments, i.e. they are both microeconomic in nature and therefore their conceptual frameworks are determined by microeconomic principles of demand and supply. This common characteristic is essentially the foundation of their conceptual frameworks as well. For instance the concept of free and fair trade doesn’t exist in the absence of a microeconomic theoretical basis, i.e. positive or/and normative statements have to be supported by some theoretical principles. Those arguments put forward in favor of fair trade are normative in nature. In fact they require those responsible including buyers of products to support the cause of action initiated elsewhere. For example requiring European consumers to pay attention to the certification of “Alternative trading organizations” of their counties is a normative economic principle. On the other hand the arguments put forward to promote free trade are positive in nature. For example the associated benefits of free international trade include international specialization of resources including labor, comparative cost advantage and higher productivity. Ricardo’s theoretical assumption on the principle of comparative advantage and the subsequent principle of absolute advantage has enabled countries to weigh their respective trading strengths before they actually engage in trade. These theoretical arguments have formed the very basis of free international trade today due to their impact on current account balances of trading partners. Assuming that some of these countries prefer to abstain from free trade on the ground that they have to suffer deficits in their current accounts, there would be less trade in the world. As a result some people would be worse off because they consume less despite their ability to pay for more goods and services. The economic and social benefits that are assumed to flow from fair trade are many and they necessarily generate productive wealth elsewhere through repeat investment. Cyclical effects of wealth creation at the local economy’s level in the recipient country are actually great and many in number. Independent analysts have pointed out that such benefits basically accrue to the very people who are at the bottom of the productive chain. Thus what is important is the fact that a greater awareness among consumers in the developed world about the certification process of these products would increase the amount of benefits and improve producers’ circumstances. For example those agricultural producers in Latin America and Africa have benefited much from this facilitation despite their inability to meet the ever increasing demand for higher standards in the consuming nations. The espousal of free trade is invariably related to the neo-liberal economic thought as well. Neo-liberalism supports free international movement of capital and labor. In other words where there is a shortage of these two a counter movement of them would correct the imbalance. The creation of plenty and thereby the reduction of prices is the notion behind these arguments though structural and institutional constraints would inevitably increase the cost. For example capital or FDI flows would move in a certain desirable direction only to be hampered by negative government policies such as persistently higher interest rates. Despite the above shortcoming FDI flows might continue to benefit those countries that continually adopt free trade policies. In fact those policies are intended to produce collective benefits and not individual benefits as in the case of fair trade. However, fair trade has a singular most appreciable outcome by way of social transformation. Local societies that depend heavily on international fair trade would not only benefit from such certification of their products but also would be able to eradicate their poverty through integration into the global productive system. Marginalized farming communities in developing countries require this kind of support to overcome their current difficulties. Above all their indigenous productive systems that heavily rely on organic farming could serve as not only an environment protection method but also as a social welfare mechanism. Free trade theory is also highly dependent on the resource utilization outcomes. When countries with specialist resources depend on free international trade to effectively use their resources in the production process, there can be a positive impact on the ultimate outcome of resource transfer. However, given the highly protective tendencies among importing countries, free trade might be affected to a greater extent. It’s here that free trade isn’t always free. For example there could be some countries, especially those free trade areas or customs unions that would impose collective restrictions on free imports/exports thus forcing third countries to adopt similar tactics in retaliation (Bhagwati, 2003). Even with the World Trade Organization (WTO) acting as the sole arbiter of free trade, there are still some insurmountable barriers to free trade in the world. While fair trade hasn’t encountered the type and level of opposition that free trade has encountered at the global level, the former isn’t an easy going proposition for producers in developing countries either. Many producers who are considered to be marginalized have no alternative but to register themselves as certificated producers under the scheme and exploit their products with the hope of getting a better price. Free traders are not faced with such difficulties. They are able to export their output as long as there are orders. These differences apart there some other aspects too that render the two systems of trade different at the very core. For example it’s mostly the commodities such as fruits, cotton, cereals, cocoa, coffee, sugar, wine and base metals that come under fair trade arrangements. Fair trade, unlike free trade, doesn’t assume a very complex dimension either. Free trade is complex and essentially dynamic. Protectionist measures such as higher tariffs on imports can be very complicated and the WTO rules on such tariffs also make it more complicated. Intellectual property rights make them still more complex. The concept of intellectual property rights doesn’t apply to fair trade. Free trade regimes exist in every region and continent while fair trade is practiced less and less in the world because it lacks both institutional and financial support. Conclusion Fair trade and free trade are actually tow poles apart though there are some common characteristics shared by both. For example these two concepts share the same microeconomic roots and concepts of theoretical evaluation. They have some common microeconomic features such as the need to carry out trade on the basis of demand and supply. But nevertheless despite this microeconomic nature of their common origin there are many differences of a fundamental nature. Free trade is essentially related to globalization which in turn is connected with big multinationals shifting their production facilities away from the original national borders to places where there are labor and material related advantages. On the other hand fair trade doesn’t depend on such big capital movements. In fact fair trade is a movement for economic and social justice. Fair traders depend on certifications of their products to obtain better prices and they produce under environmentally sustainable circumstances. Free traders aren’t obliged to do so. They might even exploit resources including labor and export to any markets where there is demand. Free trade movement has been borne out of the pure necessity to oppose protectionist tendencies on the part of individual governments or/and trading blocs. It has institutional global support in the form of WTO. But fair trade doesn’t have such support. REFERENCES 1. Bhagwati, J.N. 2003, Free Trade Today, 4th ed, Princeton University Press, New Jersey. 2. Singh, N. 2001, Free Trade Versus Fair Trade: A Movement for New Strategy, Anmol Publications Pvt. Ltd, New Jersey. BIBLIOGRAPHY 1. Farrer, T. H. F. 2008, Free Trade Versus Fair Trade, BiblioLife, South Carolina. 2. Fridell, G. 2007, Fair Trade Coffee: The Prospects and Pitfalls of Market-Driven Social Justice, University of Toronto Press, Toronto. 3. Nicholls, A. & Opal, C. 2005, Fair Trade: Market-Driven Ethical Consumption, Sage Publications Ltd, London. 4. Stiglitz, J. E. & Charlton, A. H. G. 2006, Fair Trade for All: How Trade Can Promote Development (Initiative for Policy Dialogue Series C). Oxford University Press, New York. Read More