The Free Trade/
Fair Trade Debates
Conflict over Theory & Practice
Theory of Free Trade
► What?
 In a system with open and free markets, the
economy will operate more efficiently with a
higher level of overall prosperity.
► How?
 The principle of comparative advantage will
operate with each place, each firm, each person
performing the economic activity in which that
place, firm or person has a comparative
advantage
Free Trade Theory (cont)
► Employing
the principle of comparative
advantage will allow economic specialization
and therefore greater economic efficiency.
► Not only will producers be experts at which
they do, but they will also accrue economies
of scale.
► Open markets will assure competition
among efficiency producers, assuring the
lowest possible prices at the highest quality.
Circular & Cumulative Causation
► With
people paying less for higher quality
goods, they have money to buy more things
► With more money in circulation, more firms
will succeed
► With more firms succeeding, more taxes will
be available to infrastructure, helping firms
reduce costs, have better workers, & obtain
more materials
Forward & Backward Linkages
► Circular
& cumulative growth will provide
two kinds of advantages
 “backward linkages” to the community so that
production can be more efficient
 “forward linkages” to the market so the firm can
be more competitive
Fair Trade Reality
► Free
trade generates winners & losers.
► Whether it leads to greater general
prosperity depends at least to some degree
on interpretation of data.
► Disparities in income increase.
► The powerful may gain inordinately at the
expense of the powerless.
► Assumptions of the theory are bogus.
USA Development History
► The
USA succeeded as a free trade area
after failing as a series of independent,
protectionist states.
► Yes, but the USA had other advantages, too




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Distance from the competition when young
Incredible natural resource endowment
In the North, a free, motivated work force
Development of human resources
Propitious public sector economic participation
Tariffs through History
► In
the 19th and 20th centuries, when tariff
barriers went up, the global economy
suffered.
► When barriers went down, the global
economy benefited.
► After World War I, protectionist policies led
to the Great Depression.
► After World War II, open trade policies led
to global economic expansion.
European Union As a Model
► The
European Union, as we have seen,
evolved through several steps to become a
very successful, coordinated economy with
internal trade barriers dismantled &
movement of both capital & labor.
► With so much success, how can anybody
question the wisdom of free trade?
The Rest of the Story
► Practice
does not match theory.
 Some places may have no current comparative
advantages
► Disparity
arising within a country between
those succeeding and those failing may be
too acute.
► Some economic activities need protection
for a while until they get established.
Current Practice
► The
current global economy is so skewed
that calls for free trade without ameliorating
protections are tantamount to turning the
world over to rich countries and powerful
companies.
► Promises of debt alleviation need to be kept
before rather than after the implementation
of free trade agreements.
Fair Trade Alternatives
► The
Fair Trade movement asks that trade be
fair rather than free
 Poor countries and poor people should be given
reasonable opportunities
 Inherited debt should be “forgiven”
 Annan’s Millennium Fund should be
implemented
 No one should prosper through the misery of
others