Global Exchange is a human rights organization based out of California. As an organization seeking to improve the human condition both at home and abroad, they advocate a number of solutions to the problems people face. Unfortunately, nearly all of them are appallingly ignorant and dangerous.
Simply because an organization advocates "human rights" as their mission does not mean the actions they take serve that interest. In fact, many of the "solutions" Global Exchange offers are woefully inadequate and in many cases, counterproductive.
Like most other human rights groups, Global Exchange's ideas hurt the very people they aim to help. According to Global Exchange, "fair trade" is an "economic right" (though we are not told from where this right derives) that would achieve both an economic and moral end. What is clear, however, is that fair trade would hinder the already depressed and restricted economies in poorest regions of the world.
In an ongoing series, DFN will highlight one of Global Exchange's policies toward improving human rights. In each case, we will clearly demonstrate their goal's ineffectiveness and potentially devastating consequences.
MYTH: Fair Trade practices would solve the "problems" of poverty brought about by free trade. "Fair Trade provides a sustainable model of international trade based on economic justice. It means an equitable and fair partnership between consumers in the Global North and producers in the Global South -- and is an alternative to sweatshop production."
REALITY: Fair trade is easily one of the worst policies than can be done for business, the struggling poor and consumers.
When individuals speak of "fair trade," the question that naturally arises is "Fair to whom?" The answer? Fair Trade hurts everyone, but particularly new companies, the poor and consumers.
Fair trade advocates believe by artificially placing restrictions or requirements on trading activities, certain social goods such as a higher wage or less working hours can be achieved. On some level, this is true. The problem, however, is that there are myriad negative effects, often times undercutting the very end trying to be achieved.
In reality, as Alan Reynolds of the Cato Institute points out, "Manufacturing suffers whenever politicians attempt to raise the cost of imports" and "tariffs and quotas restrict competition, restrict supply and raise prices." Global Exchange is not specifically asking for tariffs; instead, they seek to have companies purchase products in the Fair Trade system in long-term contracts. In the end, however, the result is nearly identical.
Fair trade acts as a price floor. When restrictions are made, cuts elsewhere have to be introduced. Advocates of this type of trade often believe that businesses, which run gigantic profits, can absorb these costs, so it does not matter; a dubious contention to say the least. The more likely scenario, which has been demonstrated innumerable times, is that unless coerced by the government, the businesses will not choose to incur these costs. If company A decides to buy from the Fair Trade system, it is certain that in the medium to long run, it will likely go out of business or be forced to leave the system. Incurred costs from Fair Trade do not just affect profits: it affects the entire business. Company B, buying from the free trade system, will have more money available to hire and pay more workers, improve conditions, pay out benefits, increase productivity, foster employee relations, and most importantly, provide a product at a lower cost to consumers. This naturally forces Fair Trade advocates to seek governmental regulation to enforce their beliefs, and so the theft that is Fair Trade becomes institutionalized.
Another complaint is that because companies run "large" profits (assuming that there is such a notion as large or small profits is symptomatic of the view that no one is entitled to wealth they earn), they can therefore afford to adopt Fair Trade practices. However, as aforementioned, the costs in terms of competition for any company to survive are far too high.
In the interest of argument, let us assume that the competition in a Fair Trade system would be no more than what is now expected. What would happen if company A entered into the Fair Trade system? Profits would obviously be cut, that is to be expected. But the costs on production, manufacturing, shipping and the price to consumers would jump significantly. That would in turn bring down profits. Global Exchange's model assumes that companies do not lose any profits, just incur a few more costs. Instead, we find that businesses will both lose money and incur cost. This, of course, is not even taking serious competition into account.
Seeking Fair Trade is attempting to do economics in the dark, with no regard to supply or demand. It is the market that sets the price of goods, and any obstructions that are artificially introduced to achieve an end will not only fall short, but also foment a whole new set of problems.
Economist James Bouvard, author of "The Myth of Fair Trade," says, "Fair trade is based on the doctrine that producers have rights and consumers have duties. Fair trade assumes that the consumer's freedom of choice is an injustice to the producer."
Fair Trade is the economic equivalent of alchemy. It sets out to engineer goals under the false pretense that the market can be rigged. Unfortunately for those affected, the system cannot be manipulated for their purposes.
The real solution would be free trade. The disparity in wealth between countries that have open markets versus those with controlled economies is alarming. According to the Fraser Institute's Economic Freedom of the World 2003 report, citizens in the most open economies have nearly 10 times the wealth and seven times the purchasing power.
Free trade allows for "comparative advantage," or the idea that one country can better produce a good over another country if its opportunity cost is lower. What this allows for is specialization and ultimately, trade, since the two countries can now trade their goods.
DFN's data on the effects of free trade speaks for itself. In our "Economic Freedom" article, the graphs clearly indicate that economies that adopt free trade practices perform demonstrably better. As Dan Griswold of the Cato Institute says:
| Study after study confirms that nations open to international commerce grow faster and achieve higher incomes than those that are closed. That's because open societies can more readily specialize in what they do best, and take advantage of lower global prices to benefit families and producers alike.
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