 n my first piece criticizing the ideas espoused by Global Exchange, I left a few issues unexplored. Particularly, many of the specious economic ideas that drive fair trade were not thoroughly vetted.
For example, consider the common fallacy Global Exchange and others make about the huge and "unfair" profits CEOs make. According to the claim, CEOs are worth millions, if not billions of dollars, so naturally, does it not make sense that they could cut their profits a little to make room for the added cost of the new fair trade product? In other words, in order to offset the raised cost of production, CEOs could cut from their massive stockpiles of wealth.
To someone with very little background in economics, this sounds plausible. But as prominent Princeton economist Paul Krugman points out, this belief is "wishful thinking of the first order."
Consider Krugman's comparison:
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Since when do we think that cost increases are not passed on to customers if they are small enough?...Imagine that a new local law required supermarkets to sell milk at, say, 25 cents a gallon. The loss in revenue would be only a small fraction of each supermarket's total sales - but do you really think that milk would be just as available as before? |
Among economists, Krugman is making a commonly accepted contention. Costs added onto production (with limited exception) almost always go to the consumer. Facing the prospect of artificially reduced profits many milk producers would leave the marketplace thereby reducing the supply of milk and causing unemployment. Global Exchange believes in some non-existent world where profits cut from CEOs can simply be "transferred" to make up the difference. But this is never how businesses operate, not because CEOs are stingy, but because even if one still stripped them of all their profits, a struggling or floundering business could still not be saved.
True, some cuts could stand. Global Exchange is at least correct in theory. But the substantive cuts that would be required in the medium to long run to cover added costs would be far more than any CEOs salaries (but that's not even the issue - why would a CEO surrender his salary, and better yet, why should he surrender it?). When you include all the relevant factors of the huge costs of production, lost profits, stiff competition, and others, CEOs salaries should be the least of anyone's concerns.
Global Exchange advocates a fair trade system that one enters into voluntarily (at least for now it is voluntary). Unlike mandated tariffs or quotas, this system is based on seemingly mutual benefit, right? Not necessarily. Companies will incur more costs if they feel the trade off is worth it. So, if they are forced to pay a higher wage to each worker, but feel they can get higher productivity, less turnover, or greater loyalty from their labor force, companies may enter the deal. But as Krugman underscores:
| The obvious economist's reply is, if paying higher wages is such a good idea, why aren't companies doing it voluntarily? |
Global Exchange assumes that the added cost to production, then to consumers, and then passed back onto corporations will be negligible because of some intangible good. Anyone will enter a deal in the market place if such a deal is beneficial to them, but it has yet to be established by anyone, particularly not the Fair Trade Labeling Organizations International, that voluntary fair trade (that is, until they attempt to make it mandatory) is a long-term viable system. The opportunity cost of entering into the fair trade system is simply too high.
Perhaps their most baseless argument has to be that free trade is the cause of poverty (and many other ailments of the Third World). Free trade, so goes the argument, reinforces the power of big corporations to grow fantastically wealthy while they exploit and abuse landless peasants.
Without even assessing data, this claim is preposterous. Free trade, by definition, is fair; otherwise the parties involved would not enter into a deal. More importantly, free trade means free to compete, not free from competition. DFN believes that in any marketplace, barriers to entry should be removed. In poorer regions of the world, huge impediments exist such as oppressive bureaucracy, a complete lack of property rights, no sound legal system, and others that prevent those without exorbitant wealth from even entering the market. Furthermore, when companies cannot leach off government subsidies and must fend for themselves, the competition consistently produces better results for both consumer and employee. But one can hardly call the monumental barriers that exist today "free trade." That is decidedly against everything free trade represents.
To confirm this, look at the following empirical data (the scores for each category range from 0 to 10, 10 being most optimal). According to the 2004 Economic Freedom of the World Report released by the Fraser Institute and other global think tanks, West African nations, which have huge government impediments, are desperately poor, but only because trade is restricted, not encouraged. It is clearly no coincidence that African nations, which adopt the most restrictive trade practices, are also predominantly the world's poorest.
|
Ghana
5.8 (82) |
Nigeria
5.6 (91) |
United States
8.3 (3) |
Hong Kong
8.6 (1) |
|
Legal structure and secure property rights |
4.2 |
3.1 |
8.7 |
7.0 |
|
Judicial independence |
-- |
3.4 |
7.9 |
8.0 |
|
Impartial courts |
5.4 |
3.3 |
8.0 |
8.5 |
|
Protection of intellectual property |
-- |
2.3 |
9.1 |
6.9 |
|
Military interference |
4.2 |
3.3 |
8.3 |
5.0 |
|
Integrity of legal system |
3.3 |
3.3 |
10.0 |
6.7 |
|
Inflation variability |
5.9 |
3.1 |
9.8 |
8.0 |
|
Freedom to exchange with foreigners |
7.5 |
7.0 |
7.9 |
9.8 |
|
Taxes of international trade |
6.9 |
4.9 |
8.1 |
9.9 |
|
Taxes as % of exports and imports |
6.9 |
-- |
9.4 |
9.8 |
|
Regulatory trade barriers |
-- |
5.3 |
8.5 |
9.2 |
|
Size of trade sector |
10.0 |
10.0 |
4.7 |
10.0 |
|
Private ownership of banks |
5.0 |
5.0 |
10.0 |
10.0 |
|
Extension of credit to private sector |
4.3 |
8.0 |
9.5 |
9.0 |
|
Regulation of business |
-- |
3.5 |
6.9 |
7.4 |
|
Price controls |
6.0 |
6.0 |
8.0 |
7.0 |
|
Barriers to entry for new business |
-- |
1.5 |
4.0 |
6.8 |
|
Ease of starting a new business |
-- |
4.2 |
8.1 |
8.9 |
|
Irregular payments to government officials |
-- |
2.9 |
8.1 |
8.5 |
|
Government enterprises and investment |
4.0 |
0.0 |
10.0 |
10.0 | |
What we find in West African countries is not a limited trade sector, but flimsy property rights, unfair courts, military governments, crippled legal systems, stiff trade barriers, inefficient state-run banks, minimal extension of credit to private citizens, crippling regulation of business, rigid price controls, barriers to entry (thus entrenching and likely corrupting existing businesses), unending bureaucracy, illegal kickback payments to government officials, and deep government involvement in costly ventures.
Are we really to believe it is trade and not this menagerie of corruption that is the problem? Is it not painfully obvious fair trade advocates have turned reality on its head?
The truth, of course, is that oppressively corrupt governments stymieing competition while cementing unfair relationships with existing businesses seem to be a large part of the problem. Thus, the solution is both streamlining government and opening the market to more competition, something Global Exchange does not even consider much less deems an appropriate option. With strong market regulations, only local businesses that peddle influence or giant corporations who can afford to withstand regulations (while receiving kickbacks) are able to do business. Placing yet more restrictions on this sector will do nothing but exacerbate the already serious problem.
For further information, consult the graphs on DFN's economic freedom page. Unfortunately for fair trade advocates, the facts and laws of economics cannot be wished or legislated away.
Interesting to note, aside from a vocal minority (Columbia economist Joseph Stiglitz, for example) where are the economists who lend support to fair trade systems? Why is it the case that the overwhelming majority of economists, experts on this particular issue, almost unilaterally support freer markets and freer trade?
As aforementioned, fair trade is little more than the economic equivalent of alchemy. As Krugman explains, the advocates of fantasies such as a "living wage" or "fair trade" very much "want to believe that the price of labor -unlike that of gasoline, or Manhattan apartments-can be set based on considerations of justice, not supply and demand, without unpleasant side effects."
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