OAC Archive: Big Idea: Fair Trade

Archived from the OAC Blog, shutting down today

BruceMcF in Arguments & Analyses

4/18/2006 at 1:13 PM EST

Why are the experts wrong so often about the impact of “free trade”?

What is wrong with “fair trade” agreements?  Why is it that the North American Free Trade Agreement (NAFTA) was sold as a job creator but turned out to be a destroyer of jobs both North and South of the border?

Its very simple.  The arguments for these so-called “free trade” agreements are about how the agreements work in a make-believe world.  The make-believe world is different from the real world in very important ways.  So when set loose in the real world, the predictions turn out to be false.

Why should ordinary people care about “fair trade”?

The thing is, there is a lot to like about that make-believe world.  If we could move the real world closer to the make-believe, it would benefit America.  And that’s what I call a fair-trade agreement — a system that tries to actually deliver the benefits that so-called “free trade” agreements can never deliver.

Why are the experts wrong so often about the impact of “free trade”?  Extended version.

What is the central core of the make-believe world of traditional mainstream economists?  The economy will automatically slide to full employment on its own, if you do not get in its way.

Now, imagine you have two economies that automatically slide to full employment, and you allow free trade between the two.  What happens is that things which are “relatively” cheaper in each will be traded, and both countries will specialise in what they do “relatively” efficiently.  And here is the trick — in this world, the only reason for long run unemployment is that people are too choosy to take the jobs available.  Improved efficiency gives improved productivity gives higher wages … and so some of the choosy unemployed will take the jobs, and employment rises.

You may wonder how anyone can hold to such nonsense.  Just remember that there are a lot of greek symbols in a lot of arcane mathematical equations to be mastered if you want to be an economist.  It must seem like a relief to always know what “the right answer” is when fighting through all that fancy mathematics.

But, of course, nonsense it is.  All sorts of problems can crop up when you take two countries in the real world, and you open up free trade.  After all, in the real world, they are not automatically sliding to full employment.  Which country is going to finance the spending to drive the combined economy forward? Where will the jobs go when the process begins?  What about the threat that jobs will be exported from both of the “free-trade” partners overseas?

And how about, what if the “efficiency gains” means that a large chunk of the  rural workforce of one country is thrown out of work and comes looking for work in the other?

Now, the “free-traders” don’t worry about trade balances.  They don’t have to.  After all, they imagine that they live in this lovely world where economies slide automatically to full employment.  In that world, trade imbalances are not much of a problem.

What is a “fair trade” system?

Now, let’s move to the real world. If we could have growing and balanced trade, we would still get some of the benefits of the imaginary “free-trade” system.  Both countries would tend to sell what they do relatively better, and buy what the other does relatively better.  For as long as the trade is forced to be balanced, then every dollar in imports is automatically a dollar in exports.

So this is the heart of a free-trade system.  Businesses from each participating country put finished goods that they can produce in a catalog, and they put a price on that product “free on board” in LOCAL money.  Importers from other countries place a bid of what they are willing to pay IN THEIR OWN money.  And an “exchange rate” is set that will allow the greatest amount of trades to clear.

How does a “fair trade” system avoid the traps that so-called “free-trade” systems fall into?

How does it guarantee that the trade is balanced? The MONEY paid in by importers is the same MONEY that pays the exporters from that country.  So money never leaves any of the participating countries — only the products are exchanged.

To avoid people using a country as a “warehouse of convenience”, 60 percent of the value added has to come from the exporting country.

Imagine the power of the principle that money doesn’t cross borders.  80 percent of the text of the North American so-called Free Trade Agreement is about freedom to move wealth from one country to another.  The fair-trade system is not “20 percent trade, 80 percent wealth” — it is 100 percent trade.

The benefits of a “fair trade” system

And imagine the benefit to small businesses — both in the US and in the partner country.  Their goods and services can go into a fair-trade catalog, and they can start selling to customers overseas.  And without going into the details, it is possible to make this much less intimidating and much less risky than a small business trying to sell overseas in the current system.

And most importantly, imagine the benefit to the hard working employees.  They can buy fair-trade products at competitive prices, secure in the knowledge that every dollar stayed in the US and went to pay for US goods and services, and employ US workers, to meet the needs of people overseas.

More than that, imagine the support it provides for a decent, living, minimum wage.  This system can not be used to free ride on the standard of living that makes the US a great market, while refusing to pay the wages that contribute to that standard of living.  In the fair-trade system, if you want to earn US dollars, you have to do it the old-fashioned way, by producing in the US.

This is system that is both pro-worker, and pro-small business.  While it does not lay down on its back hoping that big corporations will rub its stomach (like so many Republican polices), it is also pro-growth for corporations that continue to believe in adding value to their products in the United States.