Is international trade Fair?

FAIR INTERNATIONAL TRADE!


Paul Andrew Bourne, BSc. (Hons) Demography and Economics


?'"Fair trade" or "Fairtrade" aims to guarantee not just fair prices, but also the principles of ethical purchasing. These principles include adherence to ILO agreements such as those banning child and slave labour, guaranteeing a safe workplace and the right to unionise, adherence to the United Nations charter of human rights, a fair price that will at least cover the cost of production and facilitate social development, and especially in agriculture, protection and conservation of the environment. Fair trade also aims for long-term business relationships that are transparent throughout the chain. For consumers, fair trade seeks to guarantee high quality. This is usually indicated to the consumer by a fair trade label or brand' (Wikipedia, 2005).

The issues of trade and the gains thereof are of immense significance to economists, sociologists, political scientists and non-academics, alike. Trade directly and profoundly impacts on peoples' welfare. As such, many proponents in favour of international trade wholesale and blindly ascribe to free trade as they see the gains from trade and the benefits there from as the saviour of participation countries. Many of them do this without critically analyzing the disbenefits of trade on the receiving economy. But, why is it the case; and is it fair to say that developing countries have not had a fair share of the gains from trade as their developed counterparts?

In relation to the vexed issue of unfair gains from trade; many political pundits from developing countries including the distinguished Mr. Buddan lecturer from the department of Government at the University of the West Indies, Mona Campus, Jamaica, argue that the very nature of the establishment of the World Trade Organization (WTO) is to rubber stamp the policies and programmes of developed economies. Mr. Buddan in his article published in the Sunday Gleaner dated 18 September posits that the WTO/Cancun meeting that was abrupted ended is because of the developing countries converging on a point of principle. Further, he posits that the meeting was to advance the will of the developed world economies. The issue of unfairness cannot be established on the premise of the absolute trade figures as are published by the organization on trade (WTO) nor on a single abrupt ending of a meeting because of peoples' perception of unfairness or mistreatment. To many developing countries the issue of unfairness seems justifiable; their positions take the form of the non-economists and so make for a topical decision as view from the position of economists.

Notwithstanding Mr. Buddan's thoroughly argued perspective, one of my past and distinguished lecturers Dr. Orville Taylor has technically concurred with Buddan that there is "unfair international trade." This article will unearth provide a different side to this debate.

The developing countries are innately at a disadvantage by their very nature of high inefficiency, low levels of technologies, high dependence on primary product and a corruption system. Are the benefits of trade equally beneficial to all participating countries? The Ricardian Model provides the answer to this question. Since developing economies continue to import skills, technical capabilities by way of comparative advantage, the gains from trade will only transform the economic and social well being of their citizenry. Comparative advantage speaks to whether in producing good(s) the opportunity cost of producing the good(s) is lower in that country than it cost in other countries. Further, trade between two or more economies can benefit all the participants if each country exports the goods in which it has a comparative advantage. Hence, given that trade takes place within the context of comparative advantage, why was there an abrupt end to the WTO/Cancun meeting? Answer - Politics verses Economics.

What is trade? Trade denotes the voluntary agreement between countries to buy and-or sell goods to each other. So, what are the gains from trade? Gains from trade speak to the increased consumption derived outside of the normal capacity of the country's resources. Continuing, for the purpose of this essay, developing countries are seen as constituting inadequate physical infrastructure; poor social security systems; high level of unemployment and corruption; low use of technology, high dependence on primary products; imperfect markets and information coupled with poor work attitude of the populous.

Ricardo's Theory of Comparative Advantage predicts that all those who participate in international trade as specialists in their area of greater factor productivity will benefit from their involvement. Further, countries that lack some natural resource or other capacity can benefit by exchanging goods or services that they can produce ?'efficiently' for those they cannot. This concept was also upheld and endorsed by Heckscher and Ohlin in their trade model. Trade enhances the GDP of developing countries. In that, because they (developing countries) are able to import needed technical capabilities, capital, raw materials and tangible products that they would have being unable to produce either through geographical limitation or because of the state of their economies; this therefore becomes an advantage (or gain) from international trade. Now, given that, no developing country is endowed with all the prerequisites natural resources and capital to transform their economies and by extension provide a high standard of life for their citizenry, then why there is an issue of fairness being debate on their part.

Therefore, what is the argument of fairness of gains from trade being purported by developing countries about? Many political pundits in seeking to argue their case of unfair gains from trade flatly use the absolute trade figures as quoted in the World Trade Organization's statistics. They would say that in 1980 the figures for exports for the world stood at approximately 2.l trillion, and of this the developed countries had 1.3 trillion with the developing world exporting some 978 million. In 1990, the world export figure stood at some 3.4 trillion with the developed world having 2.5 trillion of the total and the developing economies having approximately 899 million of the total. In 2000, the world exports rose to some 6.3 trillion and of that, the developing world shared only 2.1 trillion. Those arguments highlight total ignorance of economic principles by political pundits and so they should be encouraged to continue practicing the craft of their calling and expertise; and allow the economists to do what they are best at - by explaining complex economic phenomena and theorizing. From this argument we can deduce that the increase of world exportation must be equally shared among all participants without the reason to proportionality of contribution. With this application we can postulate that no worker should be remunerated more than the other employee irrespective of qualification and-or contribution to output. As such, socialism's doctrine of equality has more merit than meritocracy within capitalism. Hence, despite each individual's value to production and his/her contribution thereto, all men must be given equal pay for all work performed.

Which based on the figures, the developed economies at any period maintained not less than 65 percent of the world export trade? This appears on the surface to be inequitable as the developed world's population is only 20 percent of the total human population. This argument is emotional. One needs to understand why politicians of developing economies use the reasoning of unfairness as it relate to the gains from trade to foster their position. Answer - they are politicians not economists. In response to the non-economists arguments, why is it or not fair? Fairness is a subjective concept and so its measurement as seen through the lens of the developing economies explains their position. As such, politicians and other human rights agents because of their market will claim unfair as their weapon on which to hide inefficiencies, mismanagement and indecisiveness. But does unfairness comes in the form of inequitableness? Answer - your thoughts are as good as mine.

Is international trade beneficial to all? Within the context of international trade, because all trade relations are carried out through voluntary involvement, one would assume that no sensible people would venture into an arrangement without being able to receive benefits from the association. Therefore, the argument here cannot be in relation to benefits but the extent of benefits from trade relations with other economies.

The position taken by many people as it relates to trade is simply that you should export more than you import. But, let us critically examine that position. When a country exports its products and its account is credited with foreign exchange from the buyer country, this money is of absolutely no benefit to the receiving country. As money cannot be consumed and so does not increase ones welfare, it is consumption that increases peoples' well being. Therefore based on the arguments forwarded by Paul R Krugman et al (2000) in their book ?'International Economics, Theory and Policy', gains from trade arise from external consumption. So, does export constitutes an increase in consumption and by extension an improvement of peoples' welfare?

The issues of benefits from trade arise because of imports. As the people of the receiving country will have available to them a wide cross-section of products and-or services for consumption. Because ones economic welfare is increased from consumption, the peoples of developing economies will benefit from trade relations with the developed world. As without such relations, the developing world would still be in a primitive state. Given their inadequacies and poor social and physical infrastructures, without trade, the developing world could not transform their economies to possible emerging economies and-or developed status.

Without international trade relations, Jamaica for example would not have being able to manufacture electricity, telephones, road network, hospital facilities, machines for factories, automobiles, some raw materials for building and foodstuff so as to satisfy the demand of its populace . Therefore without trade, the developing economies would disintegrate into mere subsistence markets and anarchy as those countries are not endowed with needed capital and human resources to generate production. Look at the example Singaporean economy. That country does not have at its disposal crude oil, natural gases, bauxite, bananas, and citruses but was able to transform it economic landscape from that of developing to an emerging economy by international trade through the background of prudent economic and political management.

By opening the economy to international trading relation with the outside world and more so developed countries, developing economies see the incentive of reduced inefficiencies that is translated into the lowering of prices for the consumer. Those price reductions will see the consumer, consuming more products and-or service. This is through importation. Hence, importation in and of itself is not evilous. What about the argument of the destruction of the infant industries due to importation? Answer - a country should only trade in goods to which it has comparative advantage and not venture into the production of inefficient commodities. Further, the closure of production in inefficient industries will result in unemployment but note that employment would have result in the efficient industries. Continuing, many developing economies have continued in the production of inefficient commodities like sugar which are at the low end of earnings and continue to support such industries through subsidies. Although they are cognizant that such industries are highly inefficient and costly to maintain, they have hanged steady to them because of political administrative reasons and as so they use this support their position of unfairness.

Are there any negatives to importation? The answer lies in the simple question, is there any disadvantage from the consumption of foods and medicine? A country is similar to that of an individual which implies that an economy is only able to not to owe another if it is able to spend less than or equal to that it receives. A country's revenue is received through either taxation or exportation and its expenses through government expenditure and importation. Simply put, revenues are obtained through exportation and expenses from importation. As such, when a country imports more than it exports this if continue will reduce future consumption. Continuing, if importation is substitute for domestic production while exportation falls and-or remain constant, the imported economy will see massive unemployment followed by structural changes within the economy. Hence, the evil of importation lies in mismanagement and the substitution of importation for exportation of domestic production.