Is Free Trade Fair Trade?


Expecting the world to treat you fairly because you are a good person is a little like expecting the bull not to attack you because you are a vegetarian.
Dennis Whole

We will assume, for sake of simplicity, that fair trade takes place between a undeveloped country (the seller) and a developed one (the buyer), but it is meritorious to mention that fair trade also applies for commerce within a country (like Mexicans from the city buying coffee from Mexicans from Chiapas).

According to Fair Trade USA, there are 20 fair trade certifiers worldwide working with over one million farmers. But recent studies by the World Bank conclude that the benefits of free trade and economic liberalization have failed to reach the world’s poorest people. Paul Rice notes that many of these “victims of globalization” are small farmers in the developing world. Fair trade is a market-based approach to solving global poverty, he explains, one that helps make free trade work for the poor[1].

Suggestions that “unfair’ products may be taxed or that imports have to comply with ILO[2] standards have led to criticism from free trade advocates and even fair trade promoters are cautious when demanding protectionism or international intervention. Fair trade is seen as paternalism in international commerce[3].

The emphasis is that is the lack of free trade what is affecting developing nations: Protectionism, quotas and agricultural subsidies from the developing world are affecting third and second world producers.

The idea of fair trade is paying a fair price for the product of the work of different farmers and workers. One of the global implications is that, in perfect market conditions, the price of a product would be fair since the producer will not be willing to sale at a lower price of a given amount. Free trade will equals fair trade (Brink Lindsey, Milton Friedman).

The problem is that there are some market imperfections:

· Several industrialized countries, like USA and France, have strong subsides to the agricultural industry[4]
· Industrialised countries are larger economies than non-industrialized[5]
·
The fluctuation of commodity prices doesn’t guarantee a living wage for many producers, forcing them into debt and poverty[6].
·
The fluctuation of the currency between first world countries and underdeveloped and developing ones often alters the price of the product in an unnatural way[7],[8]

In the 1980’s, the US government policy provided $260 billions to American Farmers[9]. In 2008, the final NAFTA protections to Mexican bean and corn will fall, leaving poor Mexican farmers alone against the most subsidized farmer economy in the world.[10]

These imperfections make very difficult for smaller traders to compete. The argument is that multinational companies are able to benefit from subsides and protections that small economies cannot provide. The economic situations that these imperfections bring may fire backwards to developed countries when illegal immigration and terrorism are exported along with the goods. Flora and fauna extinction, social unrest and deforestation are faced in producing countries as result of poor economic conditions, like Chiapas in Mexico.

Fair trade hence gives consumers to use their purchase power as a vote to balance the situation[11]; fair trade then tries to set a fair price for the product, on the basis that the price shall:

  • Covers the costs of production.
  • Allows the peasant or worker to actually make money.
  • Allows re-investment in the farm or factory and
  • Allows the peasant or worker to work on safe conditions.

So, how much is a fair trade product priced
over a non-denominational

[12]

one? Here some examples
:

Product Fair Trade Non-Denominational
Coffee 1.26 .063
Cashews 2.48 2.38
Chocolate 0.73 0.64
Tea 1.25 1.00

I haven’t find evidence on how the fair trade price
is set and I haven’t found evidence that the price stated complies with the
fair trade mandate. There is very little work on the extend of how lives are
changed by effects of fair trade[14] Hudson and Hudson document that the producers of the cooperative “Majomut” in Chiapas are getting $148 USD more per year in an entity where the average salary is $1,345 USD per year, but they cautious us of not taking one
single result as a general effect of fair trade.
The traditional test of fairness is the voluntary consent of each party to the business.It is “The free will that constitutes fair exchanges” 15] . When an estimate of the value of a third or second world
product is done in the first world, we are estimating the value of a foreign
market from a distorted perspective. The word fair is usually what a willing
buyer will pay a willing seller[16], but given the mentioned market imperfections, we need a measure to determine what would be a fair price for a given product.



[1] “Why Fair Trade?” Paul Rice, TransFair USA, video conference held on March 2006. Available on http://www.big-picture.tv
[2] International Labour Organization
[3] “The Myth of Fair Trade”, James Bovard, Cato Policy Analysis, Nov 1, 1991.
[4] The U.S. government spent $2 billion in 1986 to flood international markets with American rice, driving down the world rice price by 50 percent. The Thai rice program spent less than $100 for each Thai rice grower, while the U.S. program spent the equivalent of over $l million for each full-time American rice grower between 1985 and 1990. Thailand’s average per capita income is $860, while the average American full-time rice grower was a millionaire even before receiving lavish subsidies in the mid and late 1980s.
[5] “Why Fair Trade?” Paul Rice, TransFair USA, video conference held on March 2006. Available on http://www.big-picture.tv
[6] http://www.fairtrade.org.uk/about_what_is_fairtrade.htm, retrieved on April 2006.
[7] Washington lawyer David Palmeter observes: “In the U.S., exchange rates in anti-dumping proceedings are determined by applying an outdated regulation, a relic of an era that ended in the early 1970s when the fixed exchange rate system established at Bretton Woods was abandoned. . . . The rate established by the Federal Reserve is a quarterly one, set in advance, and based on transactions at the end of the previous quarter. . . . This average rate is used throughout the quarter unless, on any particular day, it varies from the average by more than five percent, in which case the daily rate is used.” N. David Palmeter, “Exchange Rates and Anti-dumping Determinations,” Journal of World Trade 22, no. 2 (1988): 73.
[8] The depreciation of the Brazilian real from 1.20 to the dollar in January 1999 to 3.60 as of January 2003 has caused Brazilian costs in dollar-denominated terms to fall markedly.
[9] “The Politics of Plun der”, Doug Bandow, New Brunswick, N.J.: Transaction Books, 1990.
[10] “Los Idus de Julio”, Carlos Fuentes, El Norte, Jul. 21, 2006.
[11] “Students Guide to Fair Trade”, Louisa Lyne, Oxfarm, 2006.
[12] The author resists to use the term ‘non fair trade’ since he’s trying to avoid the implication that products without the fair trade labeling are unfair.
[13] Retrieved from http://www.worldcentric.org/store/pricing.htm on July 2, 2006
[14] Hudson and Hudson, “Removing the Veil?”, Organization & Environment, Dec 2003, p 422
[15] John Taylor, 1822.
[16] U.S. Department of the Treasury, “Report of the Secretary of the Treasury to the Congress on the Operation and Effectiveness of the Anti-dumping Act and on Amendments to the Act Considered Desirable or Necessary,” 1957, pp. 1819.

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