Free vs Fair Trade for Reduction of Poverty - Term Paper Example

Is Freer and/or "fairer "trade an effective way to reduce poverty in poor countries? A country is considered to be poor or rich by studying of its Gross Domestic Product (GNP). A poor country is one which has a GNP per capita of less than 700 USD. Most of these poor countries are usually heavily burdened by debts. According to the World Bank, 40 countries are identified to be Heavily Indebted Poor Countries (HIPC). Most of these HIPC are in sub-Saharan Africa (The World Bank, 2009). Several suggestions have been made on how poor countries of the world could be assisted to overcome their challenges. According to Oluwatuyi (2004), economic freedom is a pathway for poverty eradication and the starting point for building a prosperous country. Trade between rich and poor countries tends to favour the former as they export more than they import from the poor countries causing an unfair balance in trade. Tupy (2005) argues that over-emphasis is placed on the proclamation about the benefits the world would get if free trade were to be adopted by developed world. This paper seeks to discuss if indeed free and, or fair trade is a solution to reduction of poverty in poor countries. Free Trade Free trade is a structure of trade policy that enables traders to operate and transact without government interference. Free trade, according to comparative advantage law, allows trading partners to mutually gain from the trade (World Trade Organization, 2009). Free trade policy demands that prices are to be not only true reflections of the actual demand and supply but the factors upon which resource allocation is determined as well. This is what makes free trade unique from the other trade policies that allow allocation of resources to be based on artificial prices. Theses artificial prices, in most cases, are far from the true reflection of the nature of demand and supply since they are protectionist trade policies that are utilized by governments to interfere with markets. These interferences could come in the form of supply restrictions and price adjustments. The Sub-Saharan region in Africa happens and still continues to be among the most protectionist regions around the globe (Tupy, 2005). In the period 1983-2003, rich countries cut down their mean applied tariffs by more than 80 percent. This is a gigantic value compared with the meagre 20 percent reduction by the countries in sub-Sahara Africa. Ironically, African countries are the most vocal in calling for greater access to world markets while at the same time restricting free trade in their home countries. This domestic protectionism makes it harder to fight poverty. Countries with more trade freedom tend to develop faster compared to those that have restrictions on trade. Protectionism versus Free Trade The issue of protectionism versus free trade has generated one of biggest economic debates in recent history. On one hand, free trade supporters believe in imposition of very few restrictions in trade so as to open up the global market. On the other hand, supporters of protectionism argue that limiting imports protects the domestic economy against unfair competition. Indeed from the time when the Second World War ended, with exception of Britain and Hong Kong, all the nations currently classified as developing countries have imposed high import tariffs with the aim of protecting their industries (Besecker, 2003). These protectionist efforts have paid off in making the domestic products seem more lucrative than their highly taxed imported competitors. Protecting the local industries seems to be a nice idea though its setback is that it may slow down local production qualities. Competition from external industries forces local industries to improve their production efficiencies (Baylis, Smith and Patricia, 2008). This benefit will eventually trickle down to local citizens as they would enjoy better quality goods at lower costs eventually improving the standards of living. A country that imposes high tariffs on importation would not expect its exports to be taxed any less. Exports are important to a country’s development as they not only provide a bigger market for products but also earn the much needed foreign exchange. Protectionism is enforced by countries so as to protect local jobs from being declared redundant by cheap exports. This may not always work as laws that come with protectionism not only raise tariffs on imported goods but also impose limits on how much goods are to be brought into a country. This restriction reduces the variety of goods available to the consumers and even increases the cost of doing business since the locally available goods and services may be of a higher cost than global prices. These combined reduce consumer spending which will end up destroying the very jobs that are to be protected by protectionism. Taking the U.S as an example, for every one job saved by imposing protectionism, eight other jobs are lost in the overall economy. The high taxes imposed on imported goods due to protectionism raises the general taxes as well. The bureaucracies of custom departments are expanded to comply with the government’s respective trade restrictions. These bureaucrats are paid from taxes generated by the citizens. Protection of the local industry causes the prices to rise. This is mainly experienced when a country puts barriers against much cheaper imports (Eisenberg, 2005). A good example is the Japanese shopper who buys rice at five times the global price because of the government’s attempt to protect the Japanese rice farmer. Similarly Americans suffer the same fate when it comes to sugar which is six times more expensive in the U.S. The poor countries of the world owe western banks lots of billions of dollars (Nye, 2006). If the western countries impose trade restrictions, these poor countries will export less to the western countries and hence may end up being unable to settle the debts. These examples show that for every advantage of protectionism, there is a setback that cancels the effect of the protectionism. In other words, freer trade always has a bigger advantage over protectionism. An example of what free trade can do to a nation’s GDP is clearly demonstrated by a comparison of two South American countries; Venezuela and Chile. Starting 1975, Venezuela has been reducing its economic freedom by increasing import taxes. Chile on the other hand has been doing the opposite by increasing economic freedom. This has resulted in a big growth in Chile’s GNP per capita with Venezuela only experiencing a meagre increase in the same measure. A good way of using the free trade policy is to put more effort in exports than imports. The jobs lost by opening up the markets can be gained back from the exports. If exports increase, the income to the country will increase and this will in turn create more jobs in the country. Fair Trade According to Eisenberg (2005), fair trade is viewed as a trading partnership that is based on transparency, respect and dialogue which has the aim of enforcing equality in international trade. Fair trade contributes to growth by giving improved trading conditions to marginalized workers and producers. Fair trade’s market growth has been remarkable since the 1990s with European markets showing gradual expansion in fair trade products, notwithstanding the stagnation in demand of some products. Fair Trade and Poverty Eradication Coffee is one of the main product lines of Fair Trade. The International Coffee Agreement went down in 1989 subjecting many small scale coffee farmers in the third world to forces of a free market with its volatile fluctuations in prices. Most of the developing countries depend heavily on commodity exports for a good fraction of their earnings (Eisenberg, 2005). The free market destabilized the earnings from coffee and the entrance of competitors who offered even lower prices just worked to worsen the already bad situation. Free trade came in to offer a lifeline to coffer farmers by connecting them to markets which voluntarily were willing to pay a little more for fair trade products. Fair Trade versus Free Trade Fair trade supporters argue that trade among countries is usually coercive and is never even. They continue to state that even with free trade, the smaller poorer countries will always end up gradually depending on their rich counterparts. The rich countries, mostly when trading with the poorer countries, deplete the poor countries of their natural resources and eventually slow down their growth. For some time now, this vicious cycle has continued according to the dependency theory (Eisenberg, 2005). Fair trade promoters maintain that countries with fewer export opportunities turn out to be poorer. Poor countries therefore continue to bear the brunt of not being able to penetrate the markets of rich nations (Nye, 2006). This is the main reason why fair trade organizations come in to create some sort of level ground by connecting the poor countries directly to the rich countries’ markets and bypassing middlemen who would otherwise exploit the poor farmers from the poor states. This gives the farmers more value for their products than what they would have received in a free trade arena, and therefore helps to combat poverty in the poor nations. Free trade proponents argue that whenever free trade takes place both parties live when they are satisfied otherwise the trade would not have taken place in the first place. They argue that no party emerges from the trade richer than they were before the transaction as free trade is always fair (Norberg, 2003). Conclusion Both arguments of free and fair trade have a point. It emerges clearly from this paper that free trade works much better in reducing poverty levels in poor countries as compared to protectionism. However it is important to involve the fair trade option to protect the poor farmers from exploitation during trade. Reverences Baylis J., Smith S. and Patricia O. (2008) The Globalization of World Politics (4th ed.), Oxford University Press, Oxford. Besecker T. (2003). Why poor countries are poor; A Brief Analysis, viewed 10th December, 2009 http://www.stanford.edu/class/e297c/Why%20Poor%20Countries%20Are%20Poor%20Edge.htm Eisenberg, J. (2005).Free Trade vs Fair Trade: Global envision, viewed 10th December, 2009 http://www.globalenvision.org/library/15/834 Norberg J. (2003). In Defence of capitalism, Cato institute, Massachusetts, USA. Oluwatuyi M. (2004). An African Solution for African Poverty, viewed 10th December, 2009 http://www.acton.org/commentary/commentary_227.php The World Bank (2009). Heavily Indebted Poor Countries, viewed 10th December, 2009 http://web.worldbank.org/WBSITE/EXTERNAL/TOPICS/EXTDEBTDEPT/0,,contentMDK:20260049~menuPK:528655~pagePK:64166689~piPK:64166646~theSitePK:469043,00.html. Tupy M. (2005). Trade linearization and Poverty Reduction in Sub-Saharan Africa, viewed 10th December, 2009 http://209.85.135.132/search?q=cache:3ARI4PShETIJ:www.cato.org/pubs/pas/pa557.pdf+freer+trade+poverty+reduction&cd=3&hl=en&ct=clnk&client=firefox-a World Trade Organization (2009) Freer trade cuts the cost of living, viewed 10th December, 2009 http://www.wto.org/english/thewto_e/whatis_e/10ben_e/10b04_e.htm Nye J. S. (2006) Understanding International Conflicts: An Introduction to Theory and History (6th edition), Pearson, London. Read More