Free Trade vs. Fair Trade

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*A look into the free trade vs. fair trade market*

Isabelle Preston

Period 4

In 1844, David Ricardo was the first man to develop an international trade model. Here, he explained that countries open up to trade because of the comparative advantages that come along with it. Before the World Wars, trading with other countries was near impossible, due to domestic industries and insane taxation. After the repercussion of World War II, the World Trade Organization was enacted in 1948 to promote freer trade and reduce import tariffs. The goal of the WTO is to help producers of goods and services, exporters, and importers conduct their business, with the main function being to oversee all trade and ensure that it flows as smoothly and freely as possible.

For starters, we need to define and understand what exactly free trade is. By definition, free trade is “the unrestricted purchase and sale of goods and services between countries without the imposition of constraints such as tariffs, duties, and quotas” (Investopedia). Free trade is a win – win scenario because the countries involved can concentrate their efforts on certain products and services that they have a comparative advantage with. This maximizes the country’s economic output and increases the income growth for its citizens. A free trade policy should empower a country to generate enough foreign currency to purchase the products and services it does not produce itself (Investopedia). Adam Smith, philosopher and pioneer of political economy, was one of the first known persons to talk about free trade. Smith was a big believer in the free trade system for it allowed countries to focus on making certain objects more efficiently, rather than exhausting unnecessary resources. Smith said that a man will naturally try to better his own life, thus bettering society as a whole. But to create the world of free trade Smith speaks of, the government needs to be limited. The government is used to observe, regulate, and implement rules of free trade; however, allowing citizens specific freedoms to produce and exchange goods will result in a prosperous country. This correlates to Ludwig von Mises’ statement on individualism: “the individual is free to think, to choose, and to act without being restrained by the interference of the social apparatus of coercion and oppression” (Liberty and Property). With this freedom, efficiency of production will soon follow, thus resulting in much progress.

Trade originated as just a simple means of survival. By giving someone something you owned or made in return for something they owned or made; typically of equal value and skill. We can see that in the early forms of trading, comparative advantage still played a key role. If I do not have as good resources to make corn as my neighbor, I’ll trade him a blanket for a basket of corn since I know he does not know how to sew. This easy system became distorted when people decided they needed to make profit from it, which, according to Aristotle, is harmful to the final good and a skewed idea of the actual good.

Free trade is achieved through agreements between governments. These agreements are often between wealthy nations and poorer nations. Those in favor of free trade say that even the poorest countries will benefit because of increased trade. Currently, the United States is in free trade agreement with twenty other countries (however, Germany, India, and China are not any of these countries.)The majority of the countries that the United States is in agreement with are small, developing countries.

Poor countries such as Haiti, Nepal, and Peru have established a free trade system. However, their records on poverty reduction and economic growth are next to nothing. Contrary to this, Taiwan and South Korea have kept their trade market under a watchful eye and protected their domestic industries from global trade. When they did finally open up to the trade system, they did it on their own terms and at their own pace. Not only did this produce a higher economic growth, but also resulted in lower poverty.

Free trade allows more varied goods at a lower cost than would normally be possible. So why do some people not like free trade? Some critics argue that free trade does not help developing countries; it only benefits the rich countries at the expense of the poor. Producers in poorer countries lack social security and other similar safety nets that could help them when prices are low. While producers in richer countries can wait to sell at these times forcing the developing nations to sell immediately and as a result, they lose a lot of money; thus increasing inequality between all nations.  These people believe that trade should simply be fair, not free. Well what’s the difference between fair trade and free trade? Let’s say you want to buy a candy bar. When it comes to free trade, the producer (manufacturer, business owner, etc.) sold the bar without any interference from the government (subsidies, tariffs, price controls). With regards to fair trade, there are some regulations in place to provide coverage for producers who have disadvantages in a free market. If you buy the candy bar from a developing nation, it means that the producer that made the bar had some help and assurance in making the bar and getting it to you.

Free trade enthusiasts believe that leveling the playing field among producers of all nations is the best way of maintaining global supply and ensuring that all people involved are more prosperous than they were to begin with. Opponents of free trade say that the producers in developing nations sell more of their product but end up buying less from other countries.

Fair trade aims to help the producers in developing countries. This is by obtaining better trading conditions and giving extra help to producers who promote sustainability (eco-friendly). Fair trade pushes for higher prices for producers as well as social and environmental standards. Opponents of fair trade say that anything that favors one group over another harms overall growth. (Do Something)Since the fair trade system was designed to protect the underdeveloped countries, it gives them what appears to be an advantage since developed countries do not need to be protected from certain situations. Fair trade is often said as doing business ethically.

Those in favor of fair trade state that nations with limited export opportunities become poorer and it becomes more difficult for its citizens to meet the basic needs of life. Trade presents an unfair mechanism that sends third world countries into deeper poverty. Between rich and poor nations, the prevailing market prices are unjust for the goods third world countries produce. The profit that the laborers make is barely enough to cover the cost.

So which trade is best? If we look at the situation with a utilitarian approach, we would find that fair trade would be best since more people live in third world countries than first. But there is no definite answer. As an American, I can see the benefits that free trade has to offer. And at the same time, I understand how cruel the free trade system can be to someone in a developing country. Now that both sides have been presented, it’s up for you to decide which trade system you align with. After all, we do live in an individualist world where we can form our own thoughts and ideas. And perhaps we can think like Aristotle does, which one will bring us closer to our final end or happiness?

 

  1. “Free Trade.” Investopedia. 11 April 2014
  2. Von Mises, Ludwig. Liberty and Property. Auburn, Ala.: Ludwig Von Mises Institute, Auburn University, 1988. 11 April 2014
  3. “Free Trade Agreements.” Office of the United States Trade Representative. 12 April 2014
  4. “What is the WTO.” World Trade Organization. 13 April 2014
  5. Mendel. “What’s wrong with free trade?” Action Aid. 13 April 2014
  6. “Free trade vs. Fair trade.” DoSomething.org. 13 April 2014
  7. “First, Second, and Third Worlds.” Nations Online. 13 April 2014
  8. “Free trade deals a threat to New Zealand’s future.” Maritime Union of New Zealand. 13 April 2014

 

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