Developing countries get richer by adopting free trade policies

The world is gearing up to the World Trade Organisation’s Ministerial meeting in Cancun, Mexico. A noted holiday playground, Cancun was one of the locations for Peter Styvesant’s “Passport to Pleasure” adverts. There won’t be much in the way of pleasure at this meeting, however, as different political and economic ideologies square up and North and South prepare to knock heads.

One such battle may be that surrounding the idea of “Fair Trade.” Launched by NGOs, the Fair Trade concept is fast gaining ground among governments. At first glance Fair Trade seems like a good idea, suggesting a kinder, gentler and presumably fairer trading regime in which poor countries can compete. However, the whole idea is an illusion and poor countries should steer well clear of the so-called Fair Trade crowd.

Oxfam, one of the leading lights of the Fair Trade movement, has been very vocal in its opposition to agricultural protectionism. They are quite correct on this point. According to Oxfam, the European Union lavishes €115million every day on its farmers. This increases output, pushes down the global prices of agricultural products and undermines farmers in poor countries. Perhaps more importantly, it stops poor- country farmers from competing with European farmers and effectively blocks foreign imports.

But although Fair Traders argue against the use of subsidies in wealthy countries, apparently recognising the damage that they do, they are in favour of subsidies and trade restrictions in poor countries. For instance, Fair Traders support a “Development Box” that would allow poor countries to exempt themselves from protectionism-reduction requirements. But as the Columbia University trade economist, Jagdish Bhagwati points out, average tariff rates in poor countries are already 13%, compared with only 3% in rich countries. Moreover, the tariff peaks in poor countries are far higher than in rich ones.

Vocal special interest groups the world over pressure governments to grant them protection from foreign producers. This protection ensures that the impoverished consumers in poor countries have to pay even more for the goods they consume. As Dr Razeen Sally, a trade expert from the London School of Economics, explains, “National gains from trade result directly from import liberalisation, which replaces relatively costly domestic production and spurs more efficient resource allocation.” Trade protectionism is already keeping poor countries poor; we certainly don’t need any more of it.

In supermarkets all over Europe, you can now buy fair trade coffee and other such products. NGOs, Oxfam in particular, have campaigned against multinational corporations who they feel don’t pay enough to poor country farmers for products such as coffee. Yet these corporations merely pay the global price for these commodities to all producers in all countries. Do the Fair Traders feel that poor country farmers are so dumb that they are constantly being duped by the city slickers? In any event, such fair trade products service tiny niche markets and are not crucial factors in increasing wealth in poor countries.

Another favourite cause of the Fair Traders is to argue for higher wages and better working conditions in poor countries. No one actually wants to see poor workers maltreated or exposed to dangers, but arguing that they should have the same working standards as Europeans removes their comparative advantage. The whole concept of free trade is that countries should specialise in areas in which they have a comparative advantage. They don’t have to be better in absolute terms, just in comparative terms. Poor countries have a comparative advantage in cheap, flexible labour. If Nike were expected to pay workers in Thailand the same as it pays workers in the US, then why bother going to Thailand? What would happen to all those Thai Nike workers who are now far better off making shoes than doing backbreaking work in rice paddies?

It is, of course, not surprising that rich countries have so readily accepted the concept of fair trade as it relates to labour standards. Rich country unions, nervous that their jobs will be lost to their better-priced competitors in poor countries, will do anything to raise the barriers to free trade. On 21 July, for instance, the EU formally adopted its own trade policy that seeks to raise labour standards under the guise of protecting human rights. As the EU comes under continued pressure to lower trade barriers, it has managed to poorly disguise shameless protectionism as humanitarian concern. This tactic is both imperialist and deeply damaging to poor countries.

As Alan Oxley, a former Australian ambassador to the GATT points out, vested interests in wealthy countries are leading poor countries into a “fair trade” trap. Governments of poor countries should resist this move because countries that have more open and liberal trade policies grow faster and become much wealthier than protectionist countries. A recent World Bank study shows that 24 developing countries that reduced their protectionism have a rising share of world trade. Their income growth has gone from 1% a year in the 1960s to 5% in the 1990s. Those countries that have continued to protect themselves from increased world trade have either stagnating or shrinking economies.

With freer trade the rich get richer and the poor also get richer, so long as poor country governments recognise the importance of reducing or removing trade protection. Some poor countries do indeed get poorer because their governments mistakenly impose poverty on their citizens through protectionist policies..

No doubt Oxfam and the other Fair Trade NGOs are sincerely interested in improving the lot of poor country workers but economic theory and the empirical evidence suggest that they will do far more harm than good. The EU and its rich country governments, on the other hand, will actively use the Fair Trade fallacy to continue the protectionism that keeps poor countries poor and advances their own political agendas. That they at the same time deprive their consumers of cheaper food from developing countries obviously doesn’t yet carry a high enough political price-tag to force them to change. Developing countries will therefore probably have to appeal directly to the self-interest of the citizens of developed countries in order to make progress towards real free trade.

Author: Richard Tren is a director of Africa Fighting Malaria, a health advocacy group based in South Africa. This article may be republished without prior consent but with acknowledgement to the author. The views expressed in the article are the author’s and are not necessarily shared by the members of the Free Market Foundation.

FMF Feature Article\2 September 2003