The Free Trade/ Fair Trade Debates

1. The Free Trade/Fair Trade Debates Conflict over Theory & Practice

2. Theory of Free Trade • What? • In a system with open and free markets, the economy will operate more efficiently with a higher level of overall prosperity. • How? • The principle of comparative advantage will operate with each place, each firm, each person performing the economic activity in which that place, firm or person has a comparative advantage

3. Free Trade Theory (cont) • Employing the principle of comparative advantage will allow economic specialization and therefore greater economic efficiency. • Not only will producers be experts at which they do, but they will also accrue economies of scale. • Open markets will assure competition among efficiency producers, assuring the lowest possible prices at the highest quality.

4. Circular & Cumulative Causation • With people paying less for higher quality goods, they have money to buy more things • With more money in circulation, more firms will succeed • With more firms succeeding, more taxes will be available to infrastructure, helping firms reduce costs, have better workers, & obtain more materials

5. Forward & Backward Linkages • Circular & cumulative growth will provide two kinds of advantages • “backward linkages” to the community so that production can be more efficient • “forward linkages” to the market so the firm can be more competitive

6. Fair Trade Reality • Free trade generates winners & losers. • Whether it leads to greater general prosperity depends at least to some degree on interpretation of data. • Disparities in income increase. • The powerful may gain inordinately at the expense of the powerless. • Assumptions of the theory are bogus.

7. USA Development History • The USA succeeded as a free trade area after failing as a series of independent, protectionist states. • Yes, but the USA had other advantages, too • Distance from the competition when young • Incredible natural resource endowment • In the North, a free, motivated work force • Development of human resources • Propitious public sector economic participation

8. Tariffs through History • In the 19th and 20th centuries, when tariff barriers went up, the global economy suffered. • When barriers went down, the global economy benefited. • After World War I, protectionist policies led to the Great Depression. • After World War II, open trade policies led to global economic expansion.

9. European Union As a Model • The European Union, as we have seen, evolved through several steps to become a very successful, coordinated economy with internal trade barriers dismantled & movement of both capital & labor. • With so much success, how can anybody question the wisdom of free trade?

10. The Rest of the Story • Practice does not match theory. • Some places may have no current comparative advantages • Disparity arising within a country between those succeeding and those failing may be too acute. • Some economic activities need protection for a while until they get established.

11. Current Practice • The current global economy is so skewed that calls for free trade without ameliorating protections are tantamount to turning the world over to rich countries and powerful companies. • Promises of debt alleviation need to be kept before rather than after the implementation of free trade agreements.

12. Fair Trade Alternatives • The Fair Trade movement asks that trade be fair rather than free • Poor countries and poor people should be given reasonable opportunities • Inherited debt should be “forgiven” • Annan’s Millennium Fund should be implemented • No one should prosper through the misery of others