Fair Trade

Why Should We Care about Fair Trade?

As the name implies, fair trade is simply fair. Fair trade allows countries the ability to compete successfully in the global marketplace without sacrificing employment at home. Fair trade battles protectionism and is free of the disastrous side effects of so-called free trade such as widespread unemployment, underemployment and falling wages. Fair trade may also be thought of as balanced trade.

What is Fair Trade?

Recall that foreign trade is not about trade anymore. We don't trade anything with anybody. What countries do with so-called "trade" "agreements" is that each country sets prices for imports of goods from other countries seeking to gain access to each other's markets. Most countries do this without voter approval – they trust that their government is looking out for them (ponder that thought for a moment). Of course the first question that needs to be answered is, "Why should countries allow imports in the first place?" This is where fair trade comes in. So the way it should work is as follows:

1. Decide if imports should be allowed
2. If so, adjust prices according to the exchange rates between the countries currencies
3. Compensate any domestic markets negatively affected by applying
equalization techniques: either adding tariffs, quotas or by subsidizing the affected market

We can understand (1) and (2), but why do countries apply equalization (3)? The answer is that if they did
not compensate internal domestic markets, these markets would disappear. So what? They don't deserve to exist anyway - they are not "competitive", right? Well, not exactly. Assuming the prices in a market are already internally competitive, to expose these markets to a global market will ruin them. Why? - Because the cost of living in the US is the highest in the world. Why? - Because the standard of living in the US is the highest in the world. It's not that labor unions will drive the price up - internal competition will take care of prevailing US market wages. The issue here is that the labor costs of all foreign countries are a fraction of what they are in the US. This is not by conspiracy, design or by undeserving expensive US labor - it's just the way it is. Since labor is typically around 70% of the cost of any good, it is no wonder domestic companies get really upset when governments allow such "ruinous" competition. But again, so what? Why should Americans care if some American company goes under? Because when jobs are lost, those employees can no longer spend. And when they can't spend, capitalism falls apart.

Let that sink in for a bit. Sound familiar?

Tools of the Trade

But let's get back to "trade". First, it is important to understand that quotas, tariffs and subsidies are
essential tools of trade policy. They are not evil in and of themselves – they are in fact oftentimes necessary. To remove the use of these tools altogether would result in global financial chaos – the kind we are seeing today – Free Trade!

Fair Trade is Balanced Trade

Let's take an example of fair trade. Suppose that Japan and the US both make cars. Japan wants access to US markets, and vice versa. Each country would allow the same number of cars into each other's markets. If the prices of Japan’s cars were cheaper than American cars, America would slap a tariff on the sale of each Japanese car. If instead American cars were more expensive, we would expect Japan to do the same. If this is balanced in that the wages between the nations for producing cars were relatively close, it is called "fair trade". Note that fair trade is about allowing access to markets, presumably for the benefit of a nation's consumers, offering them more choices. But the prices must be adjusted - otherwise the importing domestic market will be harmed. Now let's mess things up.

Enter Protectionism

Protectionism occurs when two countries produce the same type of product and one side gets the better end of the deal by two general means - either placing unfair quotas on imports or by placing excess tariffs on imports (or by subsidizing exports in an unfair manner). In our example, Japan exports 100,000 cars to the US but only allows 5,000 US cars into their markets. This would be an example of a protectionist policy toward America from Japan using quotas. Another form of protectionism would be to use excess tariffs. In this case, suppose the exchange rate-adjusted price of each car is $20,000. If Japan arbitrarily placed a $5,000 tariff on the sale of each US car, that would be a form of protectionism via tariffs. It would force the price of American cars higher than Japanese cars in the domestic auto market of Japan. Finally, Japan could subsidize the price of Japanese cars in the Japanese market making them cheaper to the Japanese consumers. This would be protectionism in the form of subsidies. It's really a different form of the same thing. Now let's get really wacky - let's cause a global collapse.

Enter Free Trade

Recall that Fair Trade adjusted prices according to exchange rates and to protect domestic markets as necessary from foreign competition. Here’s how free "trade" works:

1. Allow all imports and exports, no matter what.

Now this is a great deal for any country whose exchange rate or cost of living is lower than the US - basically every country in the world
except for the US. It's also great for multinationals because they can go wherever the cheapest labor is in the world. They can also avoid paying American taxes. It might benefit the American consumer because the US would not place tariffs on imports - assuming the prices weren't inflated and pocketed by the seller, which they often are. But that's another issue. The real issue is that American jobs will be lost if we allow free trade – PERIOD - a lot of American jobs. And its even worse if we decide to "trade" labor directly via services, not just products. In this case, an entire industry (like the American Programmer) can become extinct in a few years. This is what has happened in the US via H-1B visas and outsourcing. These types of labor practices are accelerating at an alarming pace and affecting all sectors of the US labor market from field workers to doctors. Wages are falling and jobs are disappearing altogether.

The Demonization of Protectionism

Free trade advocates often try to frame discussions about trade in terms of their favorite target – protectionism. But note that they have redefined the term. According to free trade supporters, protectionism is anything that is not free trade – including fair trade. They label any adjustment in price to compensate for labor disparities as protectionism. Recall that this is not the definition of protectionism. Fair trade practitioners were the first to deal with protectionism. But fair trade is not protectionism. Protectionism is the unfair use of quotas, tariffs or subsidies – not any use of these critical trade tools.

Free or Fair?

It’s probably safe to say that most Americans agree that protectionism is a bad thing. So in terms of trade policy, we are really left with one of two choices: free trade or fair trade. Look at it this way: Protectionism is on the "far left", Free Trade is on the "far right" and Fair Trade is in the middle. Fair Trade is about an equal playing field. It promotes equalization and battles protectionism. Free trade, on the other hand, mostly has no rules at all. Fair Trade allows America to compete globally without also destroying its own economy via global wage competition. Free trade on the other hand, encourages global wage competition, which destroys the economies of the richer countries. The bottom line is that countries should only stray from fair trade policies if the net benefit to their society is increased. Clearly high-paying employment is the best indicator of the "wellness" of an economy. But another measure is the trade balance. If we are running a trade surplus, that is good. If we are running a trade deficit, that is bad. So if free trade was benefiting Americans, we would see wages rising, full employment and a trade surplus. Instead we see the opposite - by a LONG shot. America has the highest trade deficit in the world – we are dead last among nations. Real wages have been falling for years, the middle class has disappeared, and the inequality in wages has increased dramatically. A return to fair trade policies is the only remedy available.