Free Trade Versus Fair Trade: How Do You Take Your Coffee?

1. Free Trade Versus Fair Trade: How Do You Take Your Coffee? Dennis C. McCornac, PhD. Sellinger School of Business Loyola University Maryland Baltimore, Maryland dcmccornac@loyola.edu

2. Anti-Globalization Benefits • Global trade has clear benefits • Developing countries can provide new, valuable markets for goods, services produced by developed countries • Technology, services, money from developed nations can improve public services, raise standard of living of developing countries • Opponents argue process benefits wealthy developed nations at expense of developing nations • Free trade encourages practices that exploit workers, destroy environment • Some promote fair trade, like fair trade coffee movement guaranteeing fair prices to coffee bean farmers Globalization versus Anti-Globalization ...the misery of being exploited by capitalists is nothing compared to the misery of not being exploited at all. ^Joan Robinson

3. Model of Free Trade The assumption is made that in a system with open and free markets, the economy will operate more efficiently with a higher level of overall prosperity. How does it Work ? The principle of comparative advantage. The ability of a firm or individual to produce goods and/or services at a lower opportunity cost than other firms or individuals. A comparative advantage gives a company the ability to sell goods and services at a lower price than its competitors and realize stronger sales margins.

4. Understanding the Boring Stuff • 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 more profits. • 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. • Promotes economies of scale. • Open markets will assure competition among efficiency producers, assuring the lowest possible prices at the highest.

5. The Good and the Bad of Free Trade • 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. • Majority of power rests in the hand of multinational corporations and rich countries • Minimize opportunities for vulnerable producers and sometimes degrades the environment • Focuses of short-term profits; evades the full costs of commerce, and overlooks the plight of marginalized people and the environment

8. The Model of Fair Trade • Paying a fair wage • Giving employees opportunities for advancement • Providing equal employment opportunities for all people, particularly the most disadvantaged • Engaging in environmentally sustainable practices • Being open to public accountability • Building sustainable long-term trade relationships • Providing healthy and safe working conditions • Providing financial and technical assistance to producers whenever possible

9. General Principles of Fair Trade Iain A Davies www.som.cranfield.ac.uk/som/dinamic-content/media/.../190608.ppt

10. Free Trade & Fair Trade: Is There a Difference?

11. Fair Trade

12. Criticisms of Fair Trade • A main criticism to fair trade is that it would generate a price distortion on the market price of a given commodity, say coffee, providing a wrong incentive to producers to invest inefficiently resources for a product for which there is scarce demand. • Fair trade producers increase production  excess supply  lower market prices • Counterarguments: • Market price is a distortion (monopoly power of producers • Does not take into account product differentiation

13. Criticisms of Fair Trade • According to the Adam Smith Institute, • <10% of the extra money paid by shoppers for Fairtrade goods makes it to the growers • The farmers are not the beneficiaries of the additional profit • Counterarguments: • Fair trade remains the only guarantee for stable, agreed prices paid to producers • Amounts are made known to public; decision to buy is up to consumer. • Benefits to non-Fair trade producers as well. E.g. funded infrastructure and programs: processing, credit facilities, quality improvement, crop diversification, conversion to organic production

14. Is Fair Trade Fairer? 2 cents - amount farmers on conventional farms receive from the average $3 latte, according to Transfair USA • 10 cents - amount of social premium paid on top of the per kilo price to fair trade certified coffee farmers • 20 cents - amount of social premium paid on top of the per kilo price to fair trade certified coffee farmers for organic coffee

15. Supporters of NAFTA Opened new markets for the three countries. Competition of lower-priced goods produced in Mexico forces down the price of goods produced in the United States and Canada; thus, U.S. and Canadian consumers “win” with lower-priced goods. Critics of NAFTA Primarily opened new markets for Mexico and Canada. Low labor costs in Mexico and lower-priced goods in the United Sates and Canada cause U.S. and Canadian companies to move their production operations to Mexico; thus, thousands of jobs are lost (“exported”) to Mexico, hurting employment in the United States and Canada. Point-Counterpoint: North American Free Trade Agreement

16. Strengthens the global economic weight of the three countries and makes them better able to compete with the EU and other trade blocs and countries of the world. Significant economic disparity exists between the affluent United States and Canada and the relatively materially impoverished Mexico, placing Mexico at a disadvantage and creating more of a service role for, rather than truly making it an equal trade partner and stronger international economic player. Point-Counterpoint (cont’d) Supporters of NAFTA Critics of NAFTA

17. Creates thousands of jobs in Mexico. Cities and towns in northern Mexico, where the majority of NAFTA-related production (maquila) takes place, enjoy much higher living standards and higher rates of employment than most other parts of the country. Many of the jobs created are low paying and are U.S.-owned companies employing Mexican workers near the border to cheaply assemble products for export to the U.S. This grew to 30% of Mexico's labor force. These workers have "no labor rights or health protections, workdays stretch out 12 hours or more Point-Counterpoint (cont’d) Supporters of NAFTA Critics of NAFTA

18. Strengthens Mexican environmental conditions through environmental side agreements negotiated along with the primary trade agreement, resulting in a healthier environment for Mexico and especially the border region; reverses environmental damage on the U.S. side of the border. The side agreements negotiated with NAFTA fall far short of strengthening environmental laws and enforcement in Mexico. U.S. companies are further attracted to relocation in Mexico due to lax enforcement. NAFTA protects the companies’ rights to free trade over the rights of people living in areas polluted by factories and other production facilities. Point-Counterpoint (cont’d) Critics of NAFTA Supporters of NAFTA

20. The Next Step: TPP (Trans - Pacific Partnership)

21. Tech Talk

22. Selected References 1. Elliot, K. (2012). “Is My Fair Trade Coffee Really Fair? Trends and Challenges in Fair Trade Certification.” CGD Policy Paper 017. Washington DC, Available at http://www.cgdev.org/files/1426831_file_Elliott_Fair_Trade_Really_Fair_FINAL.pdf 2. Mizohata, S. (September 27, 2013). “TPP a Trojan House.” AsiaTImesOnline. Available at http://www.atimes.com/atimes/Japan/JAP-02-270913.html 3. Zepeda, Eduardo, Timothy A. Wise, and Kevin P. Gallagher (2009), Rethinking Trade Policy for Development: Lessons from Mexico Under NAFTA, Carnegie Endowment for International Policy. Available at http://carnegieendowment.org/files/nafta_trade_development.pdf