The Free Trade versus Fair Trade debate was re-ignited again recently by a report from the Adam Smith Institute, which condemned Fair Trade as Unfair. So just what are the real benefits and problems with free trade, and is it the solution so often advocated?
A row recently erupted in the UK after the publication of a report by the Adam Smith Institute condemning ‘Fair Trade’ products as being unfair and working to trap the poor producers in a life of poverty. In retaliation, non-governmental organisations and development charities attacked the report as inaccurate, poorly researched and factually incorrect. According to them, the Fair Trade movement, where farmers are guaranteed a price for their produce that guarantees them a profit, is far better than allowing the market to work freely. So what is the truth? Is free trade the best way forwards, or does protectionism offer the best method of developing an economy?
Statistically, free trade is the best choice if you want to increase your countries GDP (gross domestic product). By opening up your markets, you can increase the amount of trade and investment, and according to the official statistics, you can cause massive economic growth to occur in your country. One estimate argues that free trade for all of Africa would boost Africa’s economies by a massive 6%; while the leader of the Conservative Party, and potential next Prime Minster of Britain, David Cameron MP, pointed out that if free trade in agriculture was introduced to Africa, the financial benefit to Africa would be the equivalent of all the worlds spending on development aid and assistance! Since opening up their markets, both India and China have seen massive economic growth, lifting many out of poverty.
Free Trade relies on individuals taking the initiative and seizing the opportunities around them. Instead of concentrating power in the hands of bureaucratic elites in far away government departments, free trade gives power to the people, enabling them to use their initiative and specialist knowledge that each individual has about his or her own situation, rather than allowing a small, far-off elite to make decisions for them.
By opening up markets, consumers gain, because they have more access to more products from across the world. This competition forces prices down, as they have to remain competitive in order to sell. And as prices go down, so quality needs to rise, as consumers become able to choose between different products and pick the best quality goods.
Advocates of free trade accuse the fair trade promoters of pushing a secret left-wing agenda to control markets with government intervention. And by guaranteeing a price for their farm products, Fair Trade schemes remove the incentives for farmers to find more profitable jobs and to leave their rural ways of life and develop more hi-tech industry. Therefore, Fair Trade is keeping poor farmers in their poor jobs and hindering economic development.
There is a view that Fair Trade is bad for developing states because it distorts the market mechanism. In a free market, if prices rise or fall, the producers can then change what they produce to make sure they are producing the product that will earn them the most on international markets. Yet under Fair Trade, an artificial price is guaranteed that pays no attention to the actual demand for a product, and encourages farmers to keep producing the same crops, even though other crops could earn them more money.
However, despite the theory working so well, the reality is that a perfect world of perfect free trade does not exist, and this distorts all the economic models. The European Union, whilst calling for free trade with African and Caribbean states, still hides behind its Common Agricultural Policy (CAP), which protects European farmers from direct competition, a system described as “immoral and inefficient” (David Cameron MP). Under the CAP, the average EU cow receives $2 every day, the same amount that 40% of the developing world’s people live on. And given the fact that 70% of the developing world depends directly or indirectly on agriculture, the true scale of the damage done by the Common Agricultural Policy becomes apparent. Economic Partnership Agreements between the EU and developing states are also criticised for opening up markets to EU produce, whilst restricting the access of poor states to the EU market. Quite simply, it is one rule for the rich and wealthy, and another for the poor.
It is not only the EU that is to blame: US subsidies to American cotton manufacturers amount to nearly $3 billion. Without these subsidies, US farmers would never produce cotton, because they could not compete with developing country prices. Yet because of the US subsidies, prices in the global south are depressed.
If the market worked, then prices would be subject to demand and supply. Instead, poor farmers complain that the price of coffee, for example, is determined by the New York coffee exchange, which drove prices to a 30 year low, but increased commercial profits even higher. Adams Kaunda, a cotton farmer from Malawi, said that “The farmer is the servant of the buyer”, whilst Amos Mhone, from the local farmers association, said “If I try to bargain, the buyers ask me, ‘if you don’t sell it to me at this price, what will you do: eat cotton?’”. Markets are good, but they are not completely flexible. Prices very easily rise, but it takes more effort for them to fall again, as companies prefer to rake in profits for as long as possible.
The Adam Smith Institute report cited Mexico as a state which has achieved relative prosperity through free trade deals, such as NAFTA (North American Free Trade Agreement). Yet this misses the massive number of poor people who have received none of the benefits of free trade, and ignores the structural changes in the Mexican economy brought about by unfair market competition. Whilst NAFTA aimed for cheap food for consumers, efficient production and a decrease in the numbers of people leaving Mexico for the US, the result has been a large growth in wealth inequality, and an increase in migration to the US in order to try and get work.
Small and medium sized Mexican businesses were unable to make a profit when free trade was imposed, and many US firms bought their Mexican rivals and then reduced the size of the firms. Two million farmers were made unemployed when they discovered that the crops they produced could not sell on world markets because the US subsidised its own farmers and made their produce cheaper. The Mexican government was unable to offer skill retraining for these unemployed people, so many attempted to go to the big cities or emigrate to the US. The Mexican economy now rests on drug dealing, remittances from family members living in the US sending money home, oil and gas, and the informal economy. More recently, the growth in demand for agro-fuels such as corn and maize have pushed food prices up and left Mexico importing food it used to grow naturally.
This is not just a Mexican story. In this new era of globalisation, the gap between the ‘winners’ and ‘losers’ of globalisation has become a chasm. Whilst economic indicators show that the poor workers are getting slightly more from global market economics, the rich are getting a huge amount more, so the gap between the two has in fact grown enormously. And as the rich get so much richer, inflation can start to wipe out any income gains the poor had.
According to free-market theory though, the rich getting richer should not be a problem, as the rich will then want ways of spending their money and so this demand will create a supply and thus generate new jobs in the economy, and so wealth will ‘trickle down’. Yet this is largely mythical: one only has to look at the Middle East to realize that the colossal wealth of the rich few does not trickle down to the millions of poor! The rich simply protect themselves from the poor, and look for ways of investing their money abroad. As Stiglitz wrote: “In the ideal state, the winners could compensate the losers – not that they would. And they haven’t.”
Indeed, Professor Noam Chomsky noted that the US National Intelligence Council had published a report showing that as globalisation increased, so poverty would increase, and so violence aimed at the United States, seen as the force behind globalisation, would also rise.
There is an assumption in free trade theory that poor farmers have the ability to simply change what they produce to suit market conditions. But many of these farmers do not have savings, and rely on the income from one years produce just to be able to survive to the next year. They have no ability to access world markets and gain investment, and no savings to buy the necessary grains and seeds to change crops. They have no technology and capital. That is what poverty is: how can they simply adapt to market conditions? This is why so many economists are calling for the development of the rule of law and basic infrastructure as a basis for further economic development, both at national and international levels. A good environment for small businesses is a good environment for development. International banks and trans-national companies need to adhere to rules as much as governments.
If poor farmers are given help, then there is no limit to the ingenuity of what can be achieved. Professor Jeffrey Sachs recently wrote about how Malawi’s poorest farmers were given vouchers to buy seeds and fertilizer, as they could not afford these on their own. Since then, in 2007, Malawi has grown so much food that the country now donates food to its poor neighbours.
One more point to make is that crops are part of an eco-system. Many plants do not grow in isolation: they form part of a wider eco-system which is characterised by interdependence. Other plants and animals depend on the crops that grow for their survival. By encouraging farmers to abandon the natural and native produce of their countries, and switch to foreign and exotic ‘cash crops’, wider environmental damage ensues.
The Adam Smith Institute report accuses the promoters of Fair Trade as people who want to isolate the poor from the world economy. Yet this too is a misstatement of fact. Protectionism is not necessarily isolationism. Switzerland protects its agricultural sector, but trades freely in other sectors, and the uncomfortable truth is that China and the Asian ‘Tiger’ Economies grew to develop world-class companies and industries by using protectionist policies instead of opening up their markets freely. Had they opened up their markets, the new fledgling companies that were emerging would have been either bought out by US or European multi-national corporations or driven out of business. Instead, they were protected and nurtured, and now we are used to large Indonesian and Korean companies on the world market.
Indeed, Dr Ha-Joon Change of Cambridge University argued that Europe and Britain became international world economic powers because of protectionist policies, and denial of that fact is “tantamount to disregarding their own history”. A look at the British car sector proves this: the UK had a protectionist car policy, around about 11% of the market. If any foreign company exceeded that 11% of the market, then they risked their cars being stopped altogether. The only way around this was for foreign companies to locate factories inside Britain. As a result, Britain still has some car manufacturing industries, even if the companies are foreign-owned.
Free Trade proponents have argued that those arguing for protectionism are simply trying to hide from the world economy, and doing so will only harm development and economic growth. Yet how can a state develop when the world trading system is largely controlled and designed by the powerful states for their benefit? Trans-national companies had been increasing so-called ‘exit-option’ arrangements to enable them to leave states they have invested in with little notice or compensation should the local business environment change. On the one hand, these companies are looking after their own business profits, yet in terms of development, this means that the local people cannot vote for left-wing governments, because all international companies will leave the country. It means long-term planning is restrained, as the company may leave at any point. It means governments must make sure business practices take priority over social policy.
Some of these things maybe good – too much state interference in society is arguably a bad thing, and high tax environments do destroy incentives for people to innovate and start businesses, but these exit-options are still concerning influences over national democracies.
There is also a lack of historic understanding being shown in the Adam Smith Institute paper. According to the author, poor farmers are poor because they are not in the world trading system. In reality, the poor farmers are poor because of the historic development of capitalism, and the imperialist system that made the colonies of Europe subservient economies to the European heartlands. They were controlled and arranged economically to serve the European economies. As such, when these countries became independent, they inherited a dependency relationship, where they were producing for the benefits of European economies rather than for themselves. Stiglitz argues that colonialism left Africa with neither the resources nor education to take advantage of globalisation. Under colonialism, Africa was to produce food for Europe, not have hi-tech industry or world-class universities.
The idea of a conspiracy of left-wing groups seeking to control the free market must also be undermined. Markets do need some regulation – the most highly developed financial markets of London and New York have authorities to regulate their financial services, and the EU has the Competition Directorate, which seeks to stop monopolies forming. This is recognition that capitalism produces a tendency towards monopoly, as the most successful businesses put their rivals out of business. Markets need regulating and guidance; they make good servants but bad masters. Likewise, allowing completely free international trade will simply see poor countries lose what business they have as powerful multi-national companies take over.
However, trade is a vital element of poverty reduction (if we define poverty from a Western worldview). And capitalism can offer solutions: the growth of micro-finance initiatives is an encouraging development, as these schemes help people with no money and no assets to start small businesses and make profits for themselves and their communities. But in many countries this is difficult, emphasizing the need for good law. As Paul Collier wrote, “growth is not a cure-all, but lack of growth is a kill-all”.
We must also be wary of allowing government to solve the problems. Giving power to the state is a dangerous precedent, allowing government officials to decide who becomes rich or poor, instead of letting people achieve it for themselves. And high tariff barriers do make government customs services targets for corruption and bribery.
It is also true that Fair Trade produce should have all of the costs exposed to the consumer: but this is in order to expose the massive profits that supermarkets and governments make rather than showing any problem with the costs of the produce itself.
And rich states must accept a fairer international trade regime. If they want free trade, then they must expose themselves to the negative effects of free trade. The EU Common Agricultural Policy must go; US subsidies must go. Or the West should accept that, if they are not willing to offer free trade, then they must not be hypocritical and expect African states to open their economies to Western exports.
Free trade may be the best solution in a perfect world, but we don’t live in that world, and for the sake of the poorest people, ideological straightjackets must be dropped and facts acknowledged. There is more than enough food to feed the world, and more than enough money to go round. The problem lies with too much Western self-interest.