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
• Annans Millennium Fund should be implemented
• No one should prosper through the misery of others