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Fair Trade

Leveling the playing field isn't the same as protectionism.

by James Leroy Wilson
December 21, 2006

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Fair Trade
On the subject of trade, there are Free Traders, protectionists, lower-case free traders, and fair traders.. Free Traders believe in agreements with other countries to reduce tariffs and punish "cheaters" through multi-national courts. They believe, correctly, that the exchange of goods between countries makes them inter-dependent and therefore promotes peace. But those who value national sovereignty see dire consequences, as the supposed "free trade" is often highly regulated. Congress is often required to pass laws that conform to international standards rather than serve the interests of Americans. And free trade agreements use government coercion to help multi-national corporations expand their markets, often at the expense of the little guy.

(Free Traders must also answer the question of why, after the North American Free Trade Agreement was ratified, immigration from Mexico sharply increased. Wasn't NAFTA supposed to make the lives of Mexicans better off?)

Protectionists, on the other hand, see trade policy as an exercise of nation-building. Tariffs should be imposed on other countries to promote the growth of industry in the United States and to protect American jobs. Protectionists are short-sighted, however. To give domestic producers a corner on the market is to discourage innovation and encourage price-gouging.

Lower-case free traders, unlike Free Traders, do not believe that Congress needs to pass agreements with other countries to achieve free trade - all we need to do is eliminate our own trade restrictions. The increased volume of trade helps the American consumer, whose savings are then spent on other businesses that grow the economy. If other countries want to dump inexpensive goods on us, that's their stupidity and our gain. And if they block their own ports from American goods, that's again their stupidity and their loss. Countries that restrict trade hurt only themselves.

Fair traders, on the other hand, are concerned about the overall effects of international trade. They perceive it to benefit elites the most, but that it probably does long-term harm to the poor and middle class.  If consumers are paying prices for imported goods that are lower than they should be, and drive local producers out of business, the loss of local businesses means a loss of employment opportunity, which drives down wage rates and throws communities into depressions.

I have long been uncomfortable with the term "fair trade." It sounds like populist scapegoating, as if other countries are always to blame for trade imbalances. And at worst, "fair trade" is merely code for protectionism. But fair traders do have a point.

Let's say Country A has a free market. Country B, however, is ruled by a criminal gang, that extorts money from the entire population to give to their friends. One of the regime's friends is a widget-maker. The regime showers this widget-maker with money, and also forces the widget-maker's suppliers to sell to him at below cost. As a result, the cost of making the widget is much lower than it otherwise would have been. The widget-maker then ships his products to Country A to be sold. Because these imported widgets were subsidized, and Country A's widgets wer produced at free-market costs, the imports are cheaper. So Country A's citizens start buying the imported widgets. And this throws Country A's widget producers out of business. The profits go back to Country B, where the criminal gang in charge gets a cut.

This is a case where the cost of the imported good is lower than it would be and should be if Country B's government did not intervene. The theft and extortion in Country B has effects that reach Country A. Yes, Country A's consumers save a portion of their widget budget by buying the imported widget, but this slight economic gain hardly translates into sufficient new spending and investment to offset the loss of local widget businesses. Country A benefits by buying cheaper widgets, but it must also suffer the loss of local widget businesses, greater unemployment, and fewer dollars circulating in its own economy.

Does Country A have a right to protect itself from this "invasion" of cheap goods from Country B? Some say no, the domestic policies of Country B is none of Country A's business - and besides, the lower widget prices helps Country A's low-income families.  Others say that persuasion and voluntary boycotts should be used to discourage the purchase of Country B's products, but not government intervention, . Yet others say that we should buy the import, because this will somehow weaken the criminal gang's grip on Country B. And bloodthirsty fools believe Country A should go to war with Country B.

I believe, however, that this is a reasonable position: the criminal activity of Country B's government should not provide an occasion for some citizens of Country A to profit at the expense of their fellow citizens. Country A should charge a tariff on the imported widget to the point where it is equal to (not more than) the free-market price. Then, if the foreign widgets still outsell the domestically-produced ones, that's the domestic producers' own fault; they should make better widgets. In any case, the tariff isn't "protecting" the domestic widget industry from competition, it is protecting Country A's free market system from the anti-free market policies of the criminals who rule Country B; it removes the unfair advantage. The concept of the free market doesn't mean criminals are allowed to sell stolen goods. And Country B's widgets are essentially stolen goods - the people of Country B were robbed in order to help the widget-maker.

Now let's move to a more troubling scenario. Let's say Country A does not have a free market. Instead, it is burdened with taxes and regulations. The cost of complying with regulations increases the cost of manufacturing a widget above what the free market price would have been. Country B, however, does have a free market, and its widgets sell at a free market price, not the higher government-induced price of Country A. So imported widgets from Country B are cheaper than Country A's widgets.

Now, Country A should remove its regulations so that the price of the domestic widget comes down to the free market price, but Country A's government refuses to do so; it believes its regulations are necessary. If you were an honest widget-maker in Country A, seeking no special privilege but only a fair shake, what would you do? If the regulations aren't going away, there are essentially two options:

a) lobby the government to insist that imported widgets abide by the same standards as domestic widgets, and slap tariffs on them until they are just as expensive as domestic widgets;
b) close shop in Country A and move to country B.

Again, this isn't protectionism, even though in this scenario Country B didn't do anything wrong (unless failure to regulate is wrong). The principle here is that if domestic widgets face costs and burdens that imported widgets don't, then the domestic widget-makers will be run out of business because of unfree and unfair competition. Forcing imported goods to conform to the country's standards may not make the market any freer, but it will make it as fair as possible under the circumstances.

So I am sympathetic to the "fair trade" position. To the degree that tariff restrictions could make an uneven playing field level again, it is worth pursuing. But fair traders must resist the protectionist impulse. The purpose isn't to close off trade with outsiders, or to protect dying industries or unproductive jobs, but only to level the playing field as much as practicable. Also, they should keep in mind that comparative advantage, and natural advantage, is not unfair. Some regions can produce some things cheaper than other regions can. It is easier to grow oranges in Florida than in the Yukon, and Yukon's orange growers do not deserve protection from Florida's produce. Moreover, a foreign country may  have a low cost of living and therefore low wages; this fact, by itself, doesn't make it "unfair" if a company wants to build a factory there.

But what fair traders must keep in mind most of all is that it is often their own government, not "cheating" by other countries, that is responsible for trade deficits, the decline of the manufacturing base, and the export of jobs overseas. Instead of insisting that other countries conform to America's employment and environmental standards, we should question why America has such regulations in the first place. If companies don't want to be headquartered here and employ people here, we should find out why that is. America's #1 problem isn't unfair trading partners, it is the anti-business policies of its own government.

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Just Curious from Somewhere In Time writes:
December 21, 2006
Jim,

Thanks for this article. Well done.

I agree that our goal should be to level the playing field. If imposing tariffs is the only method at our disposal then so be it. But I too have serious concerns about the head in the sand approach of protectionism.

I prefer to embrace the reality of the global economy that we now all share. In the words of author Thomas FriedmanThe World Is Flat. To ignore these growing economies and/or deny them their place at the table through protectionist trade policy is to do so at our own peril.

I also believe that American Evangelicals have a Biblical responsibility to encourage economic growth throughout the world. Blogger Keith Drury hit the nail right on the head in my opinion: I believe in free trade because I do not worry about what is “best for America” but what is best for all of the world’s people—that is the Christian view I think. On this issue I often fall in with the Republicans, and disagree with the protectionist inclinations of many Democrats. However I disagree with both parties when they practice self-centered “America first” jingoism or a “business first” motive for free trade. I want to see free trade, but not to open the world’s markets so we can get richer as a nation. I want free trade so God’s creations in India, China and Africa have a chance to lift themselves out of poverty.

In my view, the greatest tool at our disposal for encouraging world-peace, is the promise of economic prosperity for all of its citizens.

God Bless America! (and the rest of the world too!)



Jeremy from http://blog.6thdensity.net writes:
December 27, 2006
I sympathize as well with Fair Traders and with your arguments for tariffs to balance out unfair advantages producers gain by state force and plunder.

However, I'm not sure that I trust any state to level the playing field. There are some libertarians who see the state's central role as force of privilege and favoritism. There may be situations where tariffs are helpful to preserving a just market, but I don't have any faith in the state's judgement on the matter. Deciding on what the right outcome should be is after all part of the problem.

I think the goal should be a market where information is most abundant and people can factor in moral issues along with other more mundane interests when deciding how to spend their money. One of the goals of the WTO, for example, is a complete codification of the idea that products cannot be discriminated against based on how they're produced. And there are laws that prevent country of origin and production information from being provided to consumers for certain agricultural products. Morality SHOULD be a market force, and it should inform not just the laws states make but the economic decisions people make. That it doesn't is an unnatural, artificial phenomenon.

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