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Free vs. Fair Trade – Pandemic Edition

Free vs. Fair Trade – Pandemic Edition

At the beginning of studying economics, the two basic ideas every undergrad learns about are the theories of absolute and of comparative advantage, respectively. Ricardo, one of the most influential classical economists, claims that countries specializing in the production of goods for which they have a comparative advantage – meaning a lower opportunity cost in producing those goods – will be better off after engaging in trade with those countries that specialize in different products and services. A win-win situation results from the increased efficiency that derives from specialization of countries, regions or companies. This indispensable theory provides strong arguments in favour of free trade and, more importantly, of the freedom to choose whom to trade with. Its implications apply to all individuals and companies inhabiting those nations. Yet, according to the preacher of fair trade, there seems to be something amiss with Ricardo’s theory. 

The trade conundrum 

The meaning of free trade seems to be uncontroversial: “a policy to eliminate discrimination against imports and exports. Buyers and sellers from different economies may voluntarily trade without a government applying tariffs, quotas, subsidies or prohibitions on goods and services. Free trade is the opposite of trade protectionism and autarchy” (Barone, 2019). However even if the terminology is comparatively clear in contrast to many other economic theories or concepts and, up until recently, “free trade” (to be rigorous, it’s rather about its diluted relative – “trade liberalization”) featured at least as the publicly announced goal of most governments and had strong promoters in renowned organizations like the World Trade Organization (WTO), the International Monetary Fund (IMF) and the Organisation for Economic Co-operation and Development (OECD), it still remains insightful to take a closer look at the current situation.

Often there is a disparity between the expressed support of free trade and the actual policies and measures in place. “For example, GATT and FTA agreements have encouraged free trade in the high value-added sectors of production dominated by rich countries. But trade in primaries, especially foodstuffs and textiles, where poor countries typically have a comparative advantage, remains strongly regulated by developed world protectionism” (Strange, 2011).

Genuine free trade seems to be a tricky goal even for polities that sing its praises. The European Union claims to be even more than a simple free trade area since it boasts it has achieved a true single market. However, how much is all of this worth in the times of a pandemic?

More and more political leaders, with Donald Trump at their forefront, get to oppose free trade and declare that the current situation is unfair. In the current context, with the ongoing COVID-19 global crisis and the accompanying stringent constraints it brought with it, it is important to revisit the question of “free trade vs. fair trade”. Even more, we must try to understand the different meanings of fair trade and how much of the two stances on international commerce will be left in place at the end of this global crisis. 

Means and motive 

A significant challenge for achieving fair trade now lies in the lack of agreement in what this concept means.

The paper “The Fair Trade Challenge to Embedded Liberalism”, by assistant professor Sean D. Ehrlich of Florida State University, suggests, based on surveys conducted among U.S. citizens, that fair trade is “the reflection of sincere support of environmental protection and labour standards”. One might say it is a noble cause that goes hand in hand with the U.N. sustainable development goals. However, those are not the first associations that come to one’s mind when listening to Donald Trump talk about fair trade.

According to Donald Trump, free trade as it exists in its current form ravages American manufacturing; it lowers the wages of American workers and sends jobs overseas. Even though Adam Smith – the father of modern economics – wrote in The Wealth of Nations (1776): “If a foreign country can supply us with a commodity cheaper than we ourselves can make it, better buy it of them with some part of the produce of our own industry, employed in a way in which we have some advantage” (Smith, 1776), Donald Trump and like-minded people point to the circumstance that there is no level-playing field among nations – a situation which leads to market distortion and disadvantageous development for the U.S. economy. Many other countries do not have the same regulatory burden, safety standards, and environmental laws as the U.S., so the argument is that trade restrictions of some kind must be imposed to make trade happen on an equal footing, that is to be… fair.

It is debatable how accurate this observation is. However, like so often in life, the truth is somewhere (yet not necessarily in the middle). For sure, parts of the U.S. economy and its job market suffered because of the state-subsidized competition represented by Chinese goods. Because these imports are supplied at “dumping prices” (the concept itself being in need of more scrutiny), it is impossible to compete with them on a free-market basis. On the other hand, there are many labour unions and lobby groups with a strong self-interest in strengthening their position or in staying alive with the help of artificially economically alive (instead of decently accepting the blunt reality that their old way of doing business is simply less efficient than that of their competitors from other countries and does need a change). Companies that do not want to compete, modernize or innovate will always complain about free trade being unfair if this allegation serves their own purpose to keep collecting profits even if they underperform. In the eyes of those groups, protectionist measures help to achieve some sort of a fair trade – even if it means distorting the very essence of… trade in their favour.

Now, Donald Trump would not have been elected President of the United States if he was not a master of proclaiming simple messages that many people can “understand” (in the sense that the messages touch their feelings). Despite the strong resentment from a lot of media and other politicians, he makes (i.e., “tweets”) points that seem plausible to most people.

Looking at the current pandemic, this might just be a situation that reconfirms and strengthens the president’s economic worldview, which is centred around business re-shoring to the U.S. Linking trade policies to national security enable the framing of the fair trade discussion in a significantly different context.

Ludwig von Mises – a famous Austrian and classical liberal economist – once said: “The statement that one man’s boon is the other man’s damage is valid with regard to robbery, war, and booty. The robber’s plunder is the damage of the despoiled victim. But war and commerce are two different things” (Mises, 1940). Are war and commerce truly so different? The public debate about trade wars has been keeping the global economy in tension for quite some time. The argument of linking national security to international trade and the ability to produce certain goods that are essential to the safety of a nation shows that it is not so easy to differentiate among military conflicts and trade wars. Especially in the time of a global crisis of pandemic nature, it becomes more evident that nations are not any better than two hoarders fighting over the last package of toilet paper in a supermarket. (However, even “life-boat” situations – of resource scarcity driven to the survival limit – still does not disprove the welfare increasing potential of free trade, as the existence of homicide does not disprove the benefits of human cooperation based on peaceful interaction. It only needs a bit of… patience to see things this way. But patience is precisely what is ultimately scarce in… life-boat situations.) 

Cutthroat trade 

Just let me present a few of the incidents that made the headlines so far, while we are still standing in the middle of this pandemic, not being sure if the situation will turn better or worse. The picture is very complicated because the incident reveals situations in which trade freedom and trade fairness, as principles/concepts seem to be themselves “contaminated”.

Exhibit #1: U.S. authorities have been accused of diverting aid meant for other nations to their own country. A case that made the news in Germany is about a delivery of sanitary masks destined for the German police that never arrived. The commodity made in China was supposed to be reshipped in Bangkok and transported from there to Germany by air freight. However, in Bangkok, the delivery was “redirected” to the U.S., according to the German police. Bidding competition flared up during the global corona pandemic with little care of playing “fair” by any means.

Exhibit #n. Mask-related disputes were reported between countries, such as Germany, Austria and Switzerland. In another case, the Czech Republic seized protective equipment destined for Italy which is suffering under a severe outbreak and has a life-threatening shortfall of medical equipment. Turkey seized hundreds of ventilators destined for Spain. U.S. sanctions blocked Jack Ma’s donation of 100,000 face masks to Cuba. At the same time. aid packages from Russia and China are viewed with great scepticism, because of fears of attempts of buying political influence.

Outbidding is consonant with market freedom, but is it also compatible with fairness? (Still, when we speak of disrespecting contracts signed and sealed in favour of ad hoc highest bidders, this seems to be neither about freedom nor fairness.) Governmental seizure of exportable medical merchandise is a fly in the face of market freedom, but is it also unfair? (Some say that by the very “social contract”, it would be unfair for the state to abandon its own citizens in favour of foreigners, in the name of some abstract notion of universal freedom). The fact is that the ideational/ideological terrain is much murkier in “life-boat” situations. “Philosophers” may be of great value in illuminating such inquiries, but who could donate his place on a life-boat to a philosopher?

All in all, it seems that, in a time of global crisis of unprecedented scale, relying on free trade among nations is a risk that can cost the lives of a nation’s citizens. As it seems one does not even have to bother with talking about fair trade these days, too. 

A shine of reason 

Maybe this global pandemic and its stringent constraints is an opportunity to see fair trade in its purest and simplest light. As citizens have to give up many of the freedoms they once took for granted, it can show to people and policymakers that free trade (even if it is not established yet) is the most powerful form of fair trade.

Edmund Burke, a great Irish statesman, wrote in 1795: “Free trade is not based on utility but on justice” (Burke, 1795, apud Vance, 2016). And justice and fairness are very closely related words in the understanding of many people. Another interesting quote comes from the American political theorist John C. Calhoun: “I regard free trade, as involving considerations far higher, than mere commercial advantages, as great as they are. It is, in my opinion, emphatically, the cause of civilization and peace” (Calhoun, 1845 apud DiLorenzo, 2002). As we are now seeing how easily free trade is contortioned, maybe it’s time to realize that it is very difficult to achieve terms of trading that are fairer than those of free trade, since the coercively-imposed “fairness” is neither efficient nor equitable, thence it’s not even fair any longer.

A much wider concern is to see how citizens will manage to take back freedoms and powers that have shifted towards the government, which has assumed emergency powers, nominally only for the duration of the crisis. Just as interesting, it will be to observe how markets and companies will be able to import and export from where and to where they want again without being constrained by the commands of state institutions. History has proven time and time again that emergency powers seem to be a very addictive tool and, when governments take control of free economies and markets, it rarely leads to a positive outcome. The state is a lousy businessman. And a terrible moralist also.

Unfortunately, in a situation like the current one, the commandment of the hour always seems to be action-taking at any cost, as state leaders look better in the eyes of most voters doing just something, anything, even if sometimes the better outcome would be achieved by doing nothing. It is human, just and fair to put first the protection of human life, even if the economy suffers under the measures taken. It is considered immoral to weigh up a human life in numbers, and I do not promote such an attempt. However, in times like these, when nothing seems to be as it was, it is important to keep an eye on proportionality. Every measure taken has consequences that always need to be considered, and not every well-intentioned policy leads to a positive outcome.

The debate on “fair trade vs. free trade” in these times shows that as soon as free trade is strongly diminished and limited, it actually becomes clearer how fair free trade is in many ways too. Instead of continuing the old debate, it is now important to make sure we do not lose even more of the free trade among nations and, once this crisis is contained, focus on misleading pleadings. 

Conclusion 

So let me conclude this article with a call to action for all readers. Maybe you are reading this piece in self-isolation or quarantine, as I have written it. It is important that we comply and follow those rules during this time for the greater good of all of us. However, it will be urgent and vital that, as soon as this crisis is under control, we step up and take back our freedoms. Be aware and sure that governments give up their state of emergency powers, that our old freedoms are restored, and no surveillance measures remain. We should see this global crisis as an opportunity to learn from. Prepare better in the future so that, at the first sign of a pandemic, we can ensure that not all borders in Europe will be hastily locked down, trade flows do not get cut, and every “nation” looks out only for itself. For if we observe how intricate the meaning of words gets in dire times, the more we need to spend the right span of time in revisiting them in peace. 

References 

Barone, A. (2019, April 07). Free Trade Agreement (FTA) (retrieved from Investopedia: https://www.investopedia.com/terms/f/free-trade.asp.

DiLorenzo, T.J. (2002). Calhoun’s Cause: Free Trade (retrieved from Mises Daily: https://mises.org/library/calhouns-cause-free-trade).

Ehrlich, S.D. (2010). The Fair Trade Challenge to Embedded Liberalism. International Studies Quarterly, Vol. 54, No. 4 (December), pp. 1013-1033.

Mises, L. von ([1940] 2002). Human Action, The Scholar’s Edition. Ludwig von Mises Institute.

Smith, A. (1776). The Wealth of Nations. New York, N.Y.: Bantam Classic.

Strange, G. (2011). Controversies in International Political Economy: “Free Trade” vs. “Fair Trade”. Research-to-Teaching/Teaching-to-Research Working Paper No.5 (2011) (retrieved from Academia.edu: https://www.academia.edu/525365/Free_Trade_vs._Fair_Trade).

Vance, L.M. (2016). Free Trade Is Fair Trade (retrieved from The Future of Freedom Foundation: https://www.fff.org/explore-freedom/article/free-trade-fair-trade/).

 

 
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OEconomica No. 1, 2016